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The Compliance Coach: Will the SEC Ever Learn? Don't Count On It

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Just when you thought that navigating the regulatory landscape couldn’t get any more difficult, surprise! Congress and the SEC have brought us a new initiative on custody, a new ADV format and a new $100 million threshold for RIAs (each of which I will address in detail in my upcoming columns).

As to custody, this is the same SEC that less than 10 years ago saw little value to a surprise CPA exam! It is hard to believe that advisors that serve as both trustee and manager to their own firm’s retirement plan must now undergo a surprise exam that will cost the firm thousands of dollars.

How does a CPA conduct a review of assets that are not maintained away from the advisor’s primary recommended custodian, but maintained at the custodian designated by their clients’ 401(k) plan sponsor? Surely, the SEC knew or should have known that the vast majority of advisors have no relationship with the plan sponsor or administrator, the only nexus being having possession of a client’s password so that the advisor can allocate among the plan’s investment alternatives.

As to the new ADV format, what makes anyone think that clients will read this version! This is the same SEC that hasn’t seen a written disclosure statement in over 10 years (including those of new registrants) except during sporadic regulatory examinations.

As for the new threshold of $100 million in AUM–with RIA firms under that amount being moved to state oversight–how will the states (many of which are in dire fiscal trouble) be able to administer the influx of advisors that will need to transition from SEC to state registration because they will fall below the $100 million minimum required to remain SEC registered? Of course, the states will impose higher fees, but higher filing fees do not equate to adequate regulatory oversight. Madoff and Stanford were registered, paid fees to the SEC, FINRA and others: a lot of good that did.

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, 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.

Missing in Action

Where were the regulators during the past decade 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 any 10,000 “rogue” investment advisors? To which I quickly state that there exists no such number–the overwhelming 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,” just frustrate the good guys.

So now advisors must now divert even more of their time and resources (money and people) to jump through more regulatory hoops. What will be the result of these added burdens? Advisors will spend even more time with irrelevant administrative and regulatory tasks and less time being able to devote to their clients: Ah, progress!

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 regulation paints too many with the same brush 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.

Do you have custody of client assets? Remember, if you do, you must engage a CPA to commence the surprise exam process by December 31, 2010, and file Form ADV-E no later than March 31, 2011. Do you understand the new ADV format requirements? Don’t lose sleep yet, the overwhelming majority of advisors have a December 31 fiscal year-end and will not need to comply until March 31, 2011. Stay tuned.

Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker/dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at [email protected].


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