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Regulation and Compliance > Federal Regulation > SEC

Thomas Giachetti, Stark & Stark’s Legal Celebrity: The 2014 IA 25 Profile

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Tim Welsh of Nexus Strategy likes to call Tom Giachetti the only “celebrity securities attorney,” but Giachetti himself said he “never wanted to be a lawyer. Instead, he said he “wanted to be in the investment business.” So armed with a law degree and a master’s in economics, he first clerked for a federal judge for a year before going into investment banking in the mid-1980s. That’s where he had a client who lost $1 million at a large wirehouse. He contacted that brokerage firm on behalf of that New Jersey-based client and, without resorting to arbitration, Giachetti “got all his money back,” before he “started suing the wirehouses.”

Having some success, he found that many broker-dealers, including some wirehouses, “started calling on me” for their legal business, but Giachetti’s true entrée into becoming the most well-respected securities attorney in the advisory business, which more than qualifies him to be honored as a member of the IA 25 for 2014, began after Schwab Advisor Services asked him to review a legal matter for a Schwab client. That request led to a speech he presented at a Schwab Impact conference in San Francisco in 1991. Coming into prominence as the RIA industry began to grow in the late 1980s, Giachetti said his career focus on advisors “just ballooned; I was the right person in the right place at the right time,” taking his “background and knowledge to grow a business.”

As the chair of the securities practice at the law firm Stark & Stark, Giachetti has parlayed his combination of skills—“I’m very comfortable speaking in front of people, and I love to write”—to become a sought-after speaker who translates in blunt language, and with a Jersey verve, what regulators are looking for when they examine advisors. He not only tells advisors and broker-dealers what they should focus on to stay compliant, but also what they should avoid doing. His intent is to get advisors and reps to stay compliant—“Why risk your franchise?”—but also to put compliance efforts in their proper place. It’s important, he said, for advisors to not “spend a disproportionate amount of time on compliance issues that have no relevance to their practice and provide no value to clients.”

So what should SEC-regulated advisors worry about, and what should they ignore? “In this day and age, what they’re not worried about but should” is to think that “‘the SEC can’t be concerned about a small firm like mine.’” In fact, the SEC is concerned about smaller firms, since “they’re looking to send a very aggressive, punitive message to advisors.” While Giachetti normally doesn’t get political, he said that current SEC Chairman Mary Jo White “was brought in by the president to clean up Wall Street, and advisors have become part of Wall Street.” While White is “very capable,” he worries that she and current and past SEC commissioners may know much about the law, but fail to have adequate knowledge of the Advisers Act. Instead, White has “hired a lot of prosecutors, and what do prosecutors do? They prosecute.”

What White and the SEC fail to understand as well is that “advisors did not blow up the markets in ‘08 and ‘09; advisors are on the buy side, not the sell side.” So “the prosecutorial attitude taken by examiners,” he said, “is misplaced.” Moreover, he said actual SEC exams “are fraught with mistakes” and that the commission is using exams “to make laws that don’t exist, couching them in recommendations.” One example of misplaced exam items that Giachetti said he’s had a hand in eradicating is the anti-money laundering (AML) requirement, which he argued does not apply to RIAs.

Another example arose last year, when SEC examiners “brought in a valuation expert” during an exam of a large RIA firm to assess the value of the stocks held in a mutual fund that the advisor used. “How is that an advisor’s responsibility?” he wondered.

“In the past, the SEC was not that aggressive” and instead was “there to help, to give recommendations.” While he said there “are good people at the SEC,” it’s now taken a “different posture.”

Advisors should recall that the SEC has two primary mandates when it comes to exams: “that the [client’s] money is where it’s supposed to be” and to ensure that the advisor isn’t “doing anything to jeopardize the client’s underlying data, their personal information.” It’s not the SEC’s mandate to “figure out if you’re a good money manager.” He said that there is a way to resolve the current situation where SEC commissioners and examiners “don’t know anything about the ‘40 Act,” jokingly promising that if he were put on the commission, “I just want six months as commissioner, and I can fix it.”

On the broker-dealer side, he said it’s “clear that the commission and/or FINRA does not want all these small broker-dealers” around to regulate. “It’s very difficult to be a small BD” considering the amount of supervision required, especially when it comes to “monitoring reps who are not part of your office.” However, he still believes that “the smaller broker-dealer and the independent BDs will be around for a long time to come,” and that being an advisor is “still the greatest business in the world; you actually help people.” As for the onerous regulations faced by both BDs and RIAs, he philosophically noted that “there will always be individuals and entities engaging in corrupt practices; the ability of regulators to address them is minimal.” While over-regulation springing from “catastrophic events” like the Bernie Madoff scandal is a “natural reaction,” the problem is that “they punish the law abiders and don’t prevent another catastrophic event.”

(Check out Investment Advisor’s full IA 25 for 2014 list on ThinkAdvisor.)


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