For those many of you who called or e-mailed me about my last column regarding the confusion that is too often caused by both self described experts and/or regulators as to rule “misinterpretation” and the differences between “best practices” and regulatory requirements, thank you. But I wasn’t finished, I just ran out of room to write. So now that I have more space, I continue with the rantings of a simple country lawyer who at times gets extremely frustrated by the inconsistencies and misinformation that continues to plague the advisory community.
First, as I postured in my last column: “Aren’t advisors already subject to too many rules and requirements that have little to no relevance to their practices or the needs of their clients?” Please don’t misconstrue my point. I have tremendous respect for the need for necessary regulation and for those whose job it is to ensure compliance therewith, but at some point, something went terribly wrong.
Where were the regulators during the past four to six years when the Street was slowly igniting the fuse of a ticking time bomb that could (and potentially still can) wreak more havoc upon the entire country and its financial system than ten thousand “rogue” investment advisors? To which point, I hasten to add, there exists no such number! The vast majority of investment advisors are law-abiding, conscientious professionals who do their best every day for their clients. Regulations never seem to stop the bad guys, rather they just seem to frustrate the good guys. Regulations never seem to prevent a catastrophe, they just ensure that those who are law abiding are compliant. Regardless of the breadth and scope of regulations, there will always be those scant few who will choose to ignore them.
Unfortunately, too often the acts of a very few result in regulations that burden the vast many. Regulators are rarely proactive, just reactive. Is it their fault? Many times, no. However, what usually results is “one-size-fits-all” regulation attempting, in good faith, to make sure that the catastrophe never occurs again. Unfortunately, the broad brush of the regulation paints too many who have no relationship to the underlying unscrupulous acts, and now are faced with the burden of compliance. Does that mean that there should be no regulation? Of course not! Just “reasoned” and “reasonable” regulation.
A broad Brush Was Hardly Necessary
For an example of a regulation run wild, take privacy notices. I always thought that advisors were fiduciaries under the law and were required to maintain client information in confidence. But as a result of some practices by large financial institutions, all registered investment advisors (the vast majority of which are small, closely-held businesses) were painted with the same broad stroke by the regulators and required to adopt privacy policies. Was it really necessary? How many advisors do you know that were offering their clients’ information to third-party marketers or others? Now everyone provides privacy notices. However, nobody reads them, and they crowd the mailrooms and mailboxes throughout the country. I believe I even received one from my local newsboy. Was there a need to stop the practice? Of course. Was there a need for the broad brush? I submit that the answer is a resounding no. Again, does that mean that there should be no regulation? Of course not! Just “reasoned” and “reasonable” regulation.
For those of you who may correctly point out that sending a privacy notice is just a simple process, you are correct. But where does it end? I respectfully submit that you have missed the point.
The Usual Culprits
This brings me to the issues of misinformation, inconsistency, and best practices versus regulatory requirements. Specifically, these issues become no more apparent than during regulatory examinations. For example:
o Anti-Money Laundering (AML)/Patriot Act compliance. The Patriot Act is not currently applicable to investment advisors. Why? Because it would most likely result in duplicative efforts that serve no purpose (aren’t investment advisors subject to enough regulations that have little to no relevance to their practices or their clients?). Custodian firms are subject to the Patriot Act. Moreover, as indicated above, Rule 206(4)-7 indicates that advisors must establish and maintain policies and procedures that are germane to their advisory operations. Thus, if an advisor does not have any clients in any of the OFAC countries, or accepts no cash from clients, why would it need to establish a formal AML program? Should your firm have a discussion of AML/Patriot Act in its policies and procedures so that employees or representatives can have an understanding thereof? Yes. A formal program? No.