More On Legal & Compliance
from The Advisor's Professional Library- Scope of the Fiduciary Duty Owed by Investment Advisors A fiduciary obligation goes beyond the suitability standard typically owed by registered representatives of broker-dealer firms to clients. The relationship is built on the premise that the advisor will always do the right thing for the person or entity receiving advice.
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
Today I had the honor of representing independent financial advisors as I testified in front of the House Financial Services Committee on the need to protect investors and close the regulatory gap with retail investment advisers. Take a look at my oral testimony in which I expressed FSI’s support for Rep. (Spencer) Bachus’ bill, HR 4624. This is a critical issue that must be discussed and addressed soon.
(Below is an abridged version of Brown's testimony before the House Financial Services Committee on June 6, 2012. Please follow this link to read the entire testimony.--Ed.)
I am Dale Brown, President & CEO of the Financial Services Institute (FSI), and I am pleased to be here today to express our support for H.R. 4624, the Investment Adviser Oversight Act of 2012.
As you know, H.R. 4624 would authorize the Securities and Exchange Commission (SEC) to approve one or more National Investment Adviser Associations (NIAAs) to register member firms and associated persons, to set regulatory standards for their activities and operations, and to monitor compliance with these standards through routine and for cause examinations. The creation of this new regulatory structure is designed to close an unacceptable regulatory gap that leaves investors exposed to potential fraud and abuse at the hands of unscrupulous investment advisers.
FSI applauds this legislation as an essential step in creating and enhancing the trust essential for financial stability, and in making sure that all American investors receive equal protections, regardless of whether they do business with a broker-dealer or an investment adviser…
Improving the regulatory oversight of investment advisers is very important to the members of FSI...
The independent broker-dealer (IBD) community we represent has been an important and active part of the lives of American investors for more than 30 years. The IBD business model focuses on comprehensive financial planning services and unbiased investment advice. IBD firms also share a number of other similar business characteristics. They generally clear their securities business on a fully disclosed basis; primarily engage in the sale of packaged products, such as mutual funds and variable insurance products; take a comprehensive approach to their clients’ financial goals and objectives; and, most importantly for today’s discussion, provide investment advisory services through either affiliated registered investment adviser firms or such firms owned by their registered representatives...
Independent financial advisors get to know their clients personally and provide them investment advice in face-to-face meetings. Due to their close ties to the communities in which they operate their small businesses, we believe these financial advisors have a strong incentive to put the interests of their clients first and to make the achievement of their clients’ investment objectives their primary goal.
The financial advisor, along with the broker-dealer or investment adviser with which he is affiliated, designs a system of supervision to insure compliance with state and federal statutory and regulatory requirements. In other words, these financial advisors dedicate themselves to act in the best interests of their clients. It is simply how they operate as financial advisors.
Unfortunately, a small number of financial advisors take advantage of their clients’ trust by directing clients to high-priced options intended to generate more compensation for the financial advisor or, worse still, simply converting client funds to their own use. When one unscrupulous financial advisor abuses an investor’s confidence in this fashion, the reputation of all financial advisors is sullied. When one investor is harmed, the trust and confidence in our markets and financial advisors is shaken in all investors. Thus, recent market events, including the emergence of several high-profile Ponzi schemes, indicate that a careful re-examination of our current financial services regulatory framework is needed…
We know that both policymakers and our members share a common goal: to secure the American public’s financial future. We believe this can best be accomplished by improving the public’s confidence in our financial markets and the financial professionals who work in those markets…
…it is in the best interest of both individual investors and the economy as a whole if our system of regulatory supervision protects and encourages those who seek out this professional advice. We support H.R. 4624 because it will create a structure that enhances trust and confidence in the supervisory system…
…In your letter of invitation, Mr. Chairman, you asked specifically whether the current oversight and inspection of registered advisers is sufficient. FSI believes that it is most emphatically not....
Broker-dealers continue to face routine examinations on a regular and consistent basis; in 2011, FINRA examined 58% of the broker-dealer firms it is responsible for regulating. Unfortunately, investment adviser firms are not subject to routine examination. The SEC recently testified before Congress that it had examined only 8% of registered investment advisers in 2011—an average exam cycle of once every 13 years. Even more troubling, the SEC told Congress that nearly 40 percent of advisers registered with the SEC have never been examined—not once…
The risks inherent in the current regulatory system have become only too clear in recent years. Bernard Madoff was able to operate his Ponzi scheme through an unsupervised investment adviser. In addition, many “mini-Madoffs” have been flushed out by the recent recession.
The investing public deserves better protection than our current regulatory system provides. They deserve more robust oversight and supervision of the professionals to whom they have entrusted their hard-earned money. The creation of an independent regulator under SEC oversight will help close this unacceptable regulatory gap, by assuring regular examinations for a sector of the industry that currently has almost no meaningful oversight…
Nearly 4 years since Bernie Madoff’s investment adviser fraud was exposed, the safe harbor in which he operated remains open to others to exploit. Passage of the Investment Adviser Oversight Act of 2012 would bring this unconscionable situation to an end. Congress has shown, in adopting the Dodd-Frank Act and introducing H.R. 4624, that it understands the importance of maintaining and enhancing individual investors’ confidence in our financial system and in the investment advice they receive. The coordinated system of enhanced supervisory oversight provided by the regulatory system proposed by the bill will offer investors an additional measure of confidence, and will ensure that all Americans have access to competent, affordable financial advice, products and services with the highest level of consumer protection.
Main Street investors deserve an efficient, effective and unified system of oversight, whether they are working with investment advisers or broker-dealers: a smarter system that ensures true consumer protection.
H.R. 4624 will help to create such a system. We commend you, Chairman Bachus, and you, Rep. (Carolyn) McCarthy, for taking this important bipartisan step toward better regulation and supervision, and we urge you to pass this bill as quickly as possible.
(The above is an abridged version of Brown's testimony before the House Financial Services Committee on June 6, 2012. Please follow this link to read the entire testimony.--Ed.)
