More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- 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.
January 21 marks the one-year anniversary of the Securities and Exchange Commission handing over to Congress its report under Section 913 of Dodd-Frank recommending that brokers adhere to a fiduciary duty.
Since the report’s release, lobbying groups have descended on the SEC voicing their opinions on how the agency should proceed. Needless to say, hammering out a fiduciary rule proposal hasn’t been easy. SEC Chairman Mary Schapiro told AdvisorOne last April that a proposed rule on fiduciary duty would likely come in the second half of 2011. That date was pushed back, mainly due to Capitol Hill pressuring the SEC to conduct a more rigorous cost-benefit analysis on its fiduciary rule.
As Rep. Barney Frank’s deputy chief counsel at the House Financial Services Committee noted at an industry conference last December, “The SEC staff is having to do a lot more work to get this rule out.”
Schapiro now says a proposed fiduciary rule will be released this year, and announced Jan. 13 that economists and staff at the SEC who are responsible for performing a “more detailed” cost-benefit analysis on the agency’s fiduciary rule plan to ask the public to weigh in. Industry officials predict that this will likely push back an unveiling of a fiduciary proposal even further.
But Schapiro has time to ensure that a fiduciary rule gets done under her watch, as her term doesn't expire until June 2014.
Still others are glad to see the agency is taking its time. “Fortunately, the SEC has decided to give the [fiduciary] issue more study and conduct a robust cost-benefit analysis before proposing a rule,” says Robert Miller, president of the National Association of Insurance and Financial Advisors. “An SEC fiduciary rule has the potential to bring so many unintended consequences it shouldn’t be rushed into. We’re pleased that the SEC is apparently working to address some of the unanswered questions left by the original study” like the costs of such a rule.
“NAIFA is encouraged by recent signals that the SEC is taking a deliberate approach and performing a detailed cost-benefit analysis on the proposed fiduciary rule,” Miller said.
Both Barbara Roper, director of investor protection at the Consumer Federation of America, and David Tittsworth, executive director of the Investment Adviser Association, support the SEC’s more robust cost-benefit analysis on the rule as they say it will shield the regulator from potential lawsuits once the rule is issued.
The SEC must be “very mindful of potential legal challenges that may result,” from a fiduciary rule for brokers, “including providing a robust cost-benefit analysis that would pass judicial scrutiny," Tittsworth says. “If the commission proposes a rule, it will be subject to the Administrative Procedures Act process that allows all interested parties to comment.”
Adds Roper: The SEC was right to issue the request for data from the public regarding the cost-benefit analysis. “We’ve said from the outset that we want a final rule, not just a proposed rule–in other words, they need to be able to show that they’ve followed a procedure that can withstand legal challenge."
But some industry officials have been perplexed by Schapiro’s recent comments that a fiduciary rule would be “business-model neutral.” Harold Evensky, president of Evensky & Katz
But Ken Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Market Association, says the SEC “is moving in the right direction” because a fiduciary rule “absolutely needs to be business-model neutral.”
Knut Rostad, president of the Institute for the Fiduciary Standard, weighed in on the business-model neutral remark in his recent blog for AdvisorOne. He said that “ ‘business-model neutral’ has come to refer to brokerage practices explicitly not banned under Dodd Frank, such as commission-based compensation or only offering proprietary products. Either practice does not, ‘in and of itself’ violate the uniform fiduciary standard. The SEC staff Study on Investment Advisers and Broker-Dealers notes that these provisions “ ‘should not prohibit, mandate or promote particular types of products.’” ‘Business-model neutrality’ then is essentially ‘neutrality’ regarding ‘types of products,’ not neutrality regarding individual transactions which are evaluated on their individual merits.”
Since unveiling its staff study last January, Rostad says the SEC “has done a remarkable job addressing a wide variety of issues aimed at accommodating the practices of the brokerage industry and, through its January 2011 staff study, responsibly rejecting some industry concerns outright.”
Schapiro along with SEC Commissioners Elisse Walter and Luis Aguilar “have vigorously advocated that all investors should receive equal protection under the law from a uniform fiduciary standard.”
However, the challenge, Rostad says, “is to better directly address the harm of not applying the uniform fiduciary standard. The challenge is to address the implications when, as Rick Ketchum, CEO of the Financial Industry Regulatory Authority says, brokerage firms only meet ‘a minimum standard of acceptability’ as opposed to ‘the best interest’ standard.”
To proceed effectively in rule-making, Rostad warns, “the SEC has to vigorously address this issue.”