Outlook 2011, Regulation & Legislation: Advisors Brace for Dodd-Frank, New Committee Chairmen

Those advisors with less than $100 million in assets will have to switch their Form ADV registration from SEC to the states in which they do business, and in many cases, these advisors have clients in multiple states. Advisors are also concerned about new Form ADV Part II requirements, which take effect in the New Year. In 2011, advisors will be required to draft a more narrative brochure describing their business practices, conflicts of interest as well as a background of their personnel. They will also have to post the form on their web site and update it at least annually.

A new poll by Fidelity of more than 200 advisors found that nearly 30% said they are “not very confident” in being prepared to fulfill the new Form ADV Part II rules. Fidelity also found that 89% of the advisors polled believe the new requirements “will increase their workload somewhat to significantly.”

Cost-Basis Reporting

Cost-basis reporting will be another compliance chore for advisors in the New Year. The IRS recently finalized the regulations regarding cost-basis reporting, but Jodi Baskin, product manager for SunGard’s wealth management business, says that “there is still uncertainty in the securities industry” about the new regs. “One thing, however, is certain: now is the time to increase communications. It is important to begin to establish key policies and procedures around cost basis reporting. Establishing these procedures early on will assist in dealing with difficult questions that will arise,” Baskin says.

Another point of worry for advisors in the New Year is whether Financial Industry Regulatory Authority (FINRA) will be selected as the self-regulatory organization for advisors. TD Ameritrade Institutional’s quarterly sentiment survey found that only a very small minority of the advisor respondents preferred a new or existing self-regulatory organization such FINRA or the CFP Board to play a supervisory role. While the SEC is being very tight-lipped about where it stands regarding fiduciary duty and an SRO for advisors, an SEC official says that FINRA isn’t necessarily the only option.

But the Financial Services Institute (FSI) is endorsing FINRA as the SRO for advisors. Dale Brown, president of FSI, said in a Dec. 20 statement that under the supervision of the SEC, “FINRA as the SRO would focus on the routine examination and supervision of all investment advisers.” By delegating primary responsibility for investment advisor exams and supervision to FINRA, Brown (left) continued, “the SEC would be free to focus on capital markets concerns, the development of appropriate regulations for all regulated entities, the supervision of the new investment adviser regulatory authority, and the fulfillment of other appropriate regulatory goals.”

The TD Ameritrade survey also found that regarding the pending regulatory oversight changes under Dodd-Frank, nearly 70% of RIAs surveyed agreed that they will have to add resources to manage the new regulatory requirements, while nearly 85% said that they personally will need to dedicate more of their time to compliance issues. Among RIAs with at least some knowledge of the Dodd-Frank bill, the survey found that nearly 75% said that they would rely on third parties, such as attorneys, consultants and their custodians to help them manage their new compliance responsibilities.

Implementing the scores of studies mandated under Dodd-Frank will also be a task the SEC must tackle in 2011, but lack of funding is still an issue for the agency. The massive Senate Appropriations bill that was introduced in mid-December included a $1.3 billion budget for the SEC, an increase of $205 million, or 18%, over the agency’s FY 2010 budget and $41.5 million (3%) over the requested $1.25 billion budget.

Despite the fact that the SEC got more funding under Dodd-Frank, the Commission listed on its website in December its plans to defer launching a number of offices created under Dodd-Frank, like the whistleblower, credit ratings agency, investor advocacy, and municipal securities offices, due to “budget uncertainty.” The boost for the SEC under the Senate Appropriations bill would provide for increased legal and investigative staffing for oversight and enforcement duties, including mandates under Dodd-Frank and “substantial” technology updates needed at the agency.

See AdvisorOne's Outlook 2011 calendar to find the publishing dates for, and links to, other categories in the Outlook series.