More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Disagreement and debate made for an interesting panel discussion Thursday afternoon at TD Ameritrade Institutional’s 2011 national conference in San Diego. Called “The Real Impact Of Financial Regulatory Reform” and moderated by Skip Schweiss (left), president of TD Ameritrade Trust Co., the panel included Investment Advisor compliance columnist Tom Giachetti of Stark and Stark Attorneys at Law; Marilyn Mohrman-Gillis, managing director of public policy for the Certified Financial Planner Board of Standards; David Tittsworth, executive director with the Investment Adviser Association and a regular blogger for AdvisorOne; and Don Trone, CEO of Strategic Ethos.
Mohrman-Gillis began by explaining her thoughts on the recent SEC study on the level of care required by advisors.
“Overall, we as an organization feel it’s good for advisors,” she said. “The SEC recommended that there be an effort made under Dodd-Frank to have a uniform standard of fiduciary care for advisors and brokers. They said this should be no more stringent that what is currently applied under the advisors’ act.”
She noted the study recommended that the level of care should be “uniform, simple and clear” as it applies to disclosure requirements on potential conflicts of interest. Mohrman-Gillis also noted such a level would not prohibit commission-based revenue models, would not require ongoing fiduciary standards of care after a commission-based sale is made and would not prohibit sales of proprietary products.
She also said the SEC has realized and acknowledged the need for harmonization in many of the regulations currently active.
“The SEC’s litmus test for which rules to harmonize is by answering the question, ‘Does it advance thoughtful investor protection?’” she said.
Mohrman-Gillis concluded by noting the fiduciary standard is not a foregone conclusion.
“The SEC has a lot on its plate and there will certainly be push-back from Congress,” she said. “As far as next steps, we should continue use our voice and the press to pressure the SEC. Stay educated and engaged and continue to distinguish yourselves by the work that you do.”
Tittsworth spoke next, and related his experience as a Capitol Hill staffer.
“Studies of this type are usually the kiss of death for an issue,” he said. “’Let’s not do anything, let’s just study the problem instead.’ But this one has legs, and I think we will see something real come from both of the SEC’s studies.”
Dodd-Frank will not be repealed, he said, and that means more regulations for advisors, especially those that are SEC regulated. He noted Section 914 of the
standard of care study says the SEC has limited resources to keep pace with the growing advisor industry.
“The SEC conducted audits on roughly 9% of the advisors and firms it regulated last year,” Tittsworth (left), said. “By contrast, FINRA audits every one of its members every other year.”
He then listed a number of steps that could address this issue, including:
- Congress has authorized the SEC’s budget to double in the next five years, but again referring to his Capitol Hill experience, he said authorization is not appropriation, and the new congress could kill that measure.
- The Commission could self-fund by keeping more of the money it collects on transaction fees and regulatory fines, but that language was stripped from the Dodd-Frank bill.
- User fees to fund inspections are another possibility, but again that language was stripped from the bill.
- The Commission could decrease the number of advisors it regulates, which will in fact happen as individual states take over the oversight of advisors with assets under management of under $100 million.
- There could also be a self regulatory organization to take on the regulatory task. The language was stripped from the bill, but interpretations of section 914 do in fact allow for its creation.
“We feel the SEC should be that SRO, and we strongly oppose having FINRA in that role,” he said to enthusiastic applause for audience members. “They have a lack of accountability, there costs are out of control and they’re biased towards the broker-dealer model.”
As for next steps, he said it is likely congressional hearings will be held on the matter but could not predict in what time frame. He also believes the SEC will retain control over larger firms and smaller, regional firms will be regulated by FINRA.
Don Trone was the third panelist to speak. He began by relating the story of his son’s girlfriend and her graduation from beautician school.
“I asked her if she would immediately begin seeing customers,” said Trone (left). “She said she could not until a state regulator observed her cutting hair for at least 36 hours. I immediately thought that beauticians and barbers have more stringent training and education requirements than do financial advisors.”
The biggest net loser on the fiduciary issue is advisors themselves, he said, because they already have set the fiduciary bar higher than anything that’s contained in the bill. The advisors’ costs will increase to the point he feels it will require advisors, like family doctors, to roll up into larger firms in order to survive.
“I believe a government mandated fiduciary standard will happen,” he said. “You as advisors will be hurt by that because a fiduciary is an aspiration, and it will go from being a privilege the public bestows on us to instead being a right given to brokers.”
Trone noted he, too, is opposed to FINRA as the sole SRO for independent advisors because it’s “like a baseball umpire officiating a football game. FINRA is rules based, and independent advisors are principles based. They are much too different.”
Stark and Stark's Giachetti spoke last.
“Advisors are the bastard stepchildren of the SEC,” Giachetti said during the session.
By that, he meant that those on the Commission—both on the Commission level and the staff level—don’t understand the business models of RIAs who advise individual clients. As for the SEC’s SRO report, Giachetti (left) said he believed the best solution would be to create an entirely new self-regulatory organization to oversee all fiduciary advisors.