Even before the beginning of the financial crisis and almost daily revelations of new Ponzi schemes, regulators and politicians were sending strong signals of their desire for increased regulatory oversight of the activities of investment advisors and broker/dealers. That changes will come seems a certainty, but what form they will take won't be completely apparent for months yet, perhaps years. While we wait for this future regulatory tsunami, regulators have indicated some of their immediate priorities, which advisors should be aware of in their day-to-day business.
Privacy and safeguarding client information:
SEC Regulation S-P and multiple state privacy laws obligate broker/dealers and RIA firms to ensure that client data in their possession is protected from theft or disclosure to unaffiliated third parties.
This has resulted in the need for firms to mandate that their advisors follow various safeguards, such as encryption of data on advisors' computers, use of anti-spyware software, firewalls and encrypting e-mails sent from advisors' computers. These safeguards extend to vendors that advisors may contract with directly to provide services such as the storing of paper records, desktop contact management systems and proposal systems.
Defensive financial advice:
The last several years have been good for your clients. They're not used to losing money and will not remember their advisor's discussions and disclosures about market risk. Too often advisors focus their documentation efforts at the point-of-sale and not the ongoing advice and communications they provide clients post-sale. Advisors must document every client contact and recommendation to act or not to act. Advisors have been sued for not telling their clients they should have sold an investment or repositioned their accounts.
Advisors should also embrace their broker/dealer's policies and procedures and stop looking at them as "sales prevention" activities.
Solicitor arrangements:
SEC and FINRA have focused on solicitor arrangements involving registered representatives and investment advisor representatives who purport to be acting as "solicitors" when referring clients to other RIAs or third-party money managers. Regulators believe many solicitors are doing more than just giving referrals and that clients are not receiving the proper disclosures. Representatives providing active management and/or advice should either be registered as IARs or, if they are registered as an IAR, should have an advisor agreement in place and fulfill other requirements, such as delivering their Form ADV.
Independent RIA supervision:
Many broker/dealers and IARs do not recognize or appreciate that even if an IAR is providing advisory or financial planning services, the broker/dealer must supervise any securities-related activities that are executed by or through the IAR. If an advisor is also a registered representative and recommends and executes securities recommendations as part of their advisory services, the broker/dealer must supervise and approve each recommendation just like any other securities transaction.
Fees:
Right now advisors may not be doing a lot on behalf of clients or may have substantial cash positions in client accounts. Regulators are looking closely at situations where there is no activity or the advisor's clients are sitting in large cash/money market positions for months on end, yet the advisor continues to charge the same advisory fees. Advisors need to demonstrate what they did to earn this fee, such as frequent meetings with clients. If there are no transactions, advisors must be able to document other activities justifying their ongoing fees.
Staying up to date and having the right policies and procedures in place to comply with the ever-changing regulatory landscape will become a greater challenge. Many firms do not have the resources or desire to maintain a best-in-class compliance program and in the end put themselves and their advisors at risk. If advisors cannot devote the time to stay up to speed, they should ensure they have a partner that is.
Tracy DeWald is senior vice president and general counsel for Omaha-based Securities America, Inc. DeWald is an adjunct professor at Creighton University School of Law and a sought-after speaker at industry and regulatory conferences.
