All the major regulators of advisors — the Financial Industry Regulatory Authority, the Securities and Exchange Commission, individual state regulators and the North American Securities Administrators Association — disclose publicly what their enforcement focuses will be at or near year-end.
When officials from those regulatory bodies speak in person, advisors can learn how they cooperate with each other (and don’t) and gain insights into what an examiner will be looking at when they show up on advisors’ doorsteps. That’s likely why a panel at the Financial Services Institute’s annual OneVoice conference in Orlando attracted such a big audience on Tuesday afternoon.
David Bellaire, who heads FSI’s advocacy efforts as executive vice president and general counsel, began by recalling that FSI had focused its efforts in 2015 on stopping the Department of Labor’s fiduciary redefinition under the Employee Retirement Income Security Act. While that rulemaking appears to be heading forward, Bellaire vowed that FSI will continue to fight against the DOL rule, which he said had become a cornerstone of President Barack Obama’s domestic agenda in his second term, despite the “irreparable harm” it will cause to investors.
Bellaire then handed over the reins to FSI President and CEO Dale Brown, who introduced Bob Colby of FINRA, Stephen Luparello of the SEC and Judith Shaw, the NASAA president and commissioner at the Maine Office of Securities.
Responding to Brown’s question on priorities for regulators this year, Colby began by saying that FINRA will be focusing on recruitment compensation and changes to the self-regulator’s registration rules to accommodate registered individuals who may leave the industry for a short time or who change their responsibilities within an organization.
Shaw, whose term runs through September 2016, said that at “the top of our list is senior issues,” along with new products and “point of sale” issues. Speaking as she was to an audience of senior broker-dealer executives, she said that NASAA would be looking at issues regarding “fees, registration and conflicts of interest.” Particularly for IBDs, she said examiners would look at “how you supervise the outside activities” of registered reps who had their own RIAs. As for common deficiencies that state regulators are finding in exams, she cited books and records deficiencies, which “are often seen in broker-dealers” as well, she said.
She lauded members of NASAA’s advisory council, notably FSI, for their input into NASAA’s “model act” for handling incidences of elder financial abuse, which includes the ability to delay disbursements from an elderly client’s account — along with “immunity for that delay” — when there is evidence of either fraud or diminished mental capacity. Language in that model act would “require reporting” such evidence to state regulators or adult protective services authorities.
While Shaw acknowledged that there was concern among broker-dealers regarding that reporting requirement, she said it was important because “elder financial abuse doesn’t travel alone,” meaning that one instance of abuse might be accompanied by other instances.
Luparello of the SEC said that the commission’s Office of Compliance, Inspections and Examinations (OCIE) annually puts out its exam focus, which identified concern over new products, including ETFs. When asked about the possibility of the SEC “leveling” the auditing of RIA firms to the FINRA auditing level of broker-dealers by instituting third-party audits of RIAs, Luparello said that there was a “variety of questions still out there” on that possibility. Colby said that “It’s always encouraging to hear [Chairowman Mary Jo] White” of the SEC vow as she did recently that “she’ll commit more resources to RIA exams.”
When asked whether the DOL fiduciary rule would affect the SEC’s own delayed fiduciary rulemaking under Dodd-Frank, Luparello said there would be “no impact.” Shaw responded on the DOL rule that NASAA was relieved that the rule would “preserve” the current status quo under which state regulators, she said, have more enforcement strength than DOL itself.
When an audience member asked why regulators aren’t more forthright in what they expect from those they regulate, Shaw responded that while she understood the frustration, “regulators are not your compliance consultant or legal counsel.” Luparello said that “we tend to approach” issues with an “appreciation” for the industry’s “diversity,” so of necessity the SEC’s rules “have to be more general” in nature. He also said that one SEC focus will be how “exchange-traded products” like ETFs trade “at times of market stress.” But he also said that “If you are not in the trading business, then there won’t be much new regulation from the SEC this year.”
When asked about the independent broker-dealer industry itself, Luparello suggested that at least at the SEC there’s “less skepticism” about IBDs, “maybe because there’s more skepticism about other business models.” Shaw responded that at NASAA “we’ve seen improvements” among IBDs on both “products and supervision.” While compliance could “always be better,” she said it was “very encouraging” to see the progress of a NASAA model fee disclosure working group.
FINRA, Colby said, is making progress on writing a small firm rule book. Responding to a question on FINRA’s online BrokerCheck tool, Shaw said NASAA would prefer that the tool’s users be linked directly to their state regulators, so those regulators could provide additional information to consumers, including the “questions they should ask advisors” before hiring them. Shaw also said NASAA has continued concerns over FINRA’s expungement rules on BrokerCheck.
Finally, Shaw listed NASAA’s five top issues for the year: Ponzi schemes; Reg D and 506 offerings; real estate investments, including suitability and concentration of REITs in client portfolios; Internet fraud; and, “still,” oil and gas offerings.
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