More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Thursday’s hearing before the Senate Committee on Banking, Housing, and Urban Affairs put Mary Schapiro, chairman of the SEC, in the hotseat as committee members voiced their own views on the need for funding, and heard her testimony regarding the proposed 2012 budget and how it would affect the agency.
Currently the SEC is operating, as is the federal government, on a continuing resolution (CR), with the possibility of more CRs as budget battles continue in Congress. Schapiro testified about the effect of successive CRs on the ability of the SEC to do its job, as well as on a number of other matters.
Sen. Jack Reed, D-R.I., spoke first, comparing the SEC to “the cop that patrols the streets.” While no one would consider, he said, withholding resources from the nation’s police, “in some respects that hasn’t happened with the SEC.” Adding that while some say SEC funding is unaffordable, he pointed out that funding comes from “Wall Street regulation and filing fees,” so the agency’s budget has no effect on the federal deficit.
He also brought up previous testimony by Schapiro, in which she had said that some of the companies the agency must regulate spend more on IT in a year than the entire agency’s budget. “That’s like trying to catch a fast sports car with my 1991 Ford Escort,” said Reed. “Won’t happen.” He added that if the SEC is denied resources, in effect, there would be “no cop on the beat”; this would, he said, endanger economic growth and possibly lead to yet another financial crisis.
Questions posed by Reed, Sen. Robert Menendez, D-N.J.; Sen. Mark Warner, D-Va.; Sen. Kay Hagen, D-N.C.; and Sen. Mike Crapo, R-Ind., the only Republican who chose to speak during the hearing, covered various aspects of the budget issue, from how well the SEC is managing to function under a series of CRs to how efficiently the agency uses the money already available and what it would do with additional funds should full funding be approved.
Schapiro testified in response to Hagen’s question that, while the SEC was accustomed to working under CRs, they affected its ability to attract and hire personnel with the knowledge and experience that would enable them to better fulfill their mission of protecting investors and restoring confidence in the markets. She pointed out that the flash crash alone had caused a serious drop in investor confidence that was ongoing,
and that the SEC policed companies that spent more each year on their information technology than the agency’s entire budget. Schapiro also said that CRs meant the SEC could not spend the money on technological improvements, including some that would allow it to complete a major project underway to resolve tips, complaints, and referrals.
When Crapo questioned the need for implementation of Dodd-Frank provisions and asked Schapiro whether the SEC was able to provide adequate comment periods on proposed regulations, she replied that the agency used flexibility in implementation of regulations, accepting comments even past the close of the comment period and soliciting input on any unforeseen consequences of proposed regulations.
The quality of the input, Schapiro said, was excellent, and while if afforded more time to respond companies would take that extra time, she felt that the SEC was accommodating the needs of the business and investing community.
Menendez asked how well the SEC would be able to function if the current budget CR were approved, and Schapiro replied that the $41 million reduction in the SEC’s budget called for in that case would severely impact their work. Furloughs of “a significant number of employees,” as well as bringing any technology developments to a standstill, would be just two of the results. “Our ability to oversee [financial industry firms] in any but the most cursory way would be deeply impacted.”
Reed concluded the hearing by addressing the subject of a “system of privatized profits and socialized losses.” He called the SEC and related agencies “critical agents” in making sure that “when things go bad it’s not the taxpayer who picks up losses.” He pointed out that during Dodd-Frank deliberations an attempt was made to change the system so that the SEC was not subject to appropriations for its budget, and added that such an action would be attempted again, because it affects “your ability to be an independent, vigorous farsighted regulator.”