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Regulation and Compliance > Federal Regulation > FINRA

Advisor Exam Changes Afoot: IAA’s Chief Lobbyist

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The Investment Adviser Association’s top lobbyist told compliance officers Thursday to brace for two upcoming realities: the Department of Labor’s redraft of its rule to amend the definition of fiduciary will see the light of day, and changes to advisor exams are likely on the horizon.

Despite the “hue and cry” over the DOL’s redraft of its rule to amend the definition of fiduciary on retirement accounts, the redraft “will emerge” from the Office of Management and Budget, Neil Simon, IAA’s vice president for government relations, said at IAA’s annual compliance conference in Arlington, Virginia, just outside Washington.

While some rules fall into a “black box” while being reviewed by OMB and never reappear, the DOL’s fiduciary redraft “is not one of them,” Simon said.

Now that the Obama administration “has embraced” the DOL’s redraft to amend the definition of fiduciary under the Employee Retirement Income Security Act as part of its “middle-class agenda,” the redraft will be released by OMB after a 90-day review, he continued. Until then, while the “speculation” about what the redraft actually says can be “enlivening,” the outcry over the rule by lawmakers and industry opponents is “premature,” as “we simply don’t know what’s in it.”

Simon said he anticipates a different rule proposal from the one that was first released by DOL in 2010. “I think Labor learned its lesson after the 2010 proposal.”

As to advisor exams and whether there really is a problem with the Securities and Exchange Commission’s exam rate of advisors, Stephanie Monaco, partner at Mayer Brown, opined that she didn’t believe there is a problem in the exam rate.

But Simon said that “at the very least, there is a broadening political perception that the oversight of advisors is not sufficient.” In this post-Madoff era, he continued, “there is a sense from policymakers that something needs to be done” about the frequency of advisor exams, and the “political reality is that change is likely to occur and we should be ready to address it.”

While SEC Chairwoman Mary Jo White has directed SEC staff to review the third-party audit exam concept, Simon said, “my fear is that it [third-party exams] will gain some traction because Congress is unlikely to give the SEC the money it needs to properly staff up” its Office of Compliance Inspections and Examinations. Plus, he added, industry groups such as IAA continue to press for bipartisan Senate support for legislation that would allow the SEC to collect user fees from advisors to help boost their exam rate, however, “it’s just not gaining bipartisan support.”

Said Simon: “We are trying to find some support in the Senate” for a user-fees bill, but “if that doesn’t happen, [will] White throw up her hands and say something has to happen here” and raise the prospect of third-party exams? “There is no flesh on those [third-party] bones as of yet.”

Simon added that the Financial Industry Regulatory Authority has not “surrendered its long-held goal of assuming responsibility for advisors.”

Mary Keefe, managing director at Nuveen Investments, added on the panel discussion with Simon that many advisory firms “already use a lot of third parties to assess the effectiveness of our compliance,” such as compliance consultants. “I think many of us are already expending resources on third-party verification,” she said, adding that the SEC “should survey or report in ADVs what kinds of third-party resources advisors are using.”

Said Keefe: While “there is some room to think about” third parties, she would not like to have FINRA be a third-party auditor for advisors, as FINRA’s mindset is “much more rule and product oriented.” While FINRA examiners are “very highly educated in what they’re doing,” Keefe said, “I would not want a BD examiner coming in to examine our asset management business.”

Stephanie Monaco of Mayer Brown agreed. “I live in fear of FINRA assuming the responsibility for examining advisors,” she said. While FINRA examiners are “very skilled BD people […] we are investment advisors and I have found in my 30 plus years of practice there is different wiring; if you try to rewire the BD exam staff at FINRA then all of the sudden advisor activities would be measured against BD standards.”

— Check out Lou Harvey: Obama Just Blew Up Your Business Model; Here’s What You Can Do on ThinkAdvisor.


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