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Regulation and Compliance > Federal Regulation > SEC

SEC Waging Enforcement ‘War’ on Advisors: Giachetti

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The most important word to advisors these days is fiduciary, according to Tom Giachetti, chairman of the securities practice at Stark & Stark.

What that means is that advisors are responsible and regulators like the SEC will hold you to it. “You can’t blame anybody. You can’t say, ‘my consultant told me,’” Giachetti said at the fourth annual Junxure Advisor Conference in Denver on Thursday. Advisory firms that rely on consultants do so at their own peril, Giachetti said.

“There’s a war out on your profession,” Giachetti said. For example, the SEC doesn’t appreciate that when clients roll their 401(k) assets into an IRA, they’re getting the value of advisors’ expertise. 

The Securities and Exchange Commission has two mandates, Giachetti said: to make sure clients’ money is where it should be and that advisors aren’t doing anything to undermine their clients’ information. The agency shouldn’t be trying to determine whether an advisor is good at his or her job or the kinds of returns they’re getting for their clients’ portfolios.

“If you stink, clients will leave,” he said. He suggested the SEC “fire half the examiners” and hire more forensic accountants and IT professionals to address the agency’s two mandates.

He said the current SEC and its chairwoman, Mary Jo White, are “by far the most aggressive” he’s ever seen. Prior to leading the SEC, White was “one of the best federal prosecutors this country’s ever known,” he said, but that gives her a different approach to regulating the financial industry. 

“The president brought her in to do one thing: to clean up Wall Street. And unfortunately, she thinks you’re Wall Street,” Giachetti said.

(Related: DOL Fiduciary Has Many Advisors Mulling Career Change: Fidelity Survey)

Compliance is taking advisors’ time away from clients, Giachetti said, and regulators “think they’re improving things. It’s nonsense.”

Giachetti explained some compliance areas where advisors have to be extra careful. 

Wrap program sponsors have an “economic disincentive to make transactions” and should “be very careful” to disclose their transactions, he said. “If you’re buying the retail shares not the institutional class shares because you don’t want to spend the money, you’re going to enforcement,” according to Giachetti.

Advisors registered with the states aren’t free from scrutiny. “States have become enormously punitive,” Giachetti said. Advisors have found themselves penalized $25,000 for missing a filing notice, he said. Some states have required advisors to give clients a chance to rescind transactions, he said.

Advisors who collect too much information from clients can run into trouble. “Don’t answer a question that you’re not going to remember,” he said. 

For example, he discouraged advisors from using risk questionnaires because they are difficult for clients to answer honestly. “Clients don’t know how they’re going to react to losing money until they lose money,” he pointed out. 

Advisors who do use broad questionnaires to gather information from clients should make sure they include disclosure as to the limitations of that information, Giachetti suggested.

The SEC addressed advisors’ custody of client assets in three tranches, Giachetti said. The first is if anyone at the firm serves as a trustee for a client, they have custody of the client’s assets unless a bank, trust company or broker-dealer serves as a custodian, or the client is a family member or has a “substantial preceding, material relationship” with the advisor.

The second is standing letters of authorization. If advisors have standing authority to transfer money to third parties, including tax payments, they have custody of client assets, even if they can’t change the payee on the agreement. 

Finally, if advisors have passwords to clients’ held-away accounts like a 401(k), they have to prove to the SEC that they can’t access the account to trade or transfer money out of it, Giachetti said.

“Be ready for an exam,” he recommended. “If what you’re doing isn’t ready for an exam, you’re wasting your time.”

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