Think Advisor: Never-Examined Advisors Top SEC’s 2014 Exam Priorities List

Melanie Waddell of Think Advisor reports on the SEC’s examination priorities for 2014, including advisors who have never been examined.

Excerpt: The Securities and Exchange Commission today announced its examination priorities for 2014, which include advisors who have never been examined, including new private fund advisors; wrap fee programs; quantitative trading models; and payments by advisors and funds to entities that distribute mutual funds.

As for broker-dealers, the securities regulator says it will zero in on sales practices and fraud, issues related to the fixed income market, and trading issues, including compliance with the new market access rule.

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The Wall Street Journal: Voices: John Taft, on the State of the Financial Industry Post-Crisis

John Taft of WSJ’s Wealth Adviser discusses fundamental reform issues that remain, particularly when it comes to the ethics and culture of the financial industry, including the fiduciary standard of care.

Excerpt: There are a lot of milestone dates used to mark the failure of the financial system. But the milestone that most affected my clients was the breaking of the buck of the Reserve Primary Fund, the largest money-market fund, on Sept. 16, 2008.

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Broad Coalition Message to Congress : Support H.R. 1627 to Improve SEC Investor Protection

WASHINGTON, D.C. -In a letter sent last week to all Members of Congress, a broad – based group of organizations, including consumer and industry groups and state regulators, urges support of H.R. 1627, the Investment Adviser Examination Improvement Act of 2013. The bill – sponsored by Rep. Maxine Waters (D-CA) and Rep. John Delaney (D-MD) – would authorize the Securities and Exchange Commission (SEC) to collect an annual “user fee” from registered investment advisers to increase the frequency of investment adviser examinations and to better protect American investors.

According to the groups that signed the letter, “It is imperative that the SEC be able to properly oversee the activities of registered investment advisers. We are deeply concerned that the SEC’s current inability to examine investment advisers more frequently increases opportunities for investor fraud and abuse.”

The group added: “A user fee is the best option to increase investor protection because it is an efficient, economical, and common sense solution to the SEC’s chronic problem of insufficient examination resources.”

The coalition is composed of a broad range of organizations, including AARP, Consumer Federation of America (CFA), Certified Financial Planner Board of Standards (CFP Board), Financial Planning Association® (FPA®), Investment Adviser Association (IAA), National Association of Personal Financial Advisors (NAPFA), and the North American Securities Administrators Association (NASAA).

The SEC has responsibility for examining about 11,000 federally registered investment advisers that manage approximately $48 trillion in assets. But the agency faces significant resource challenges in maintaining a robust examination program, as evidenced by the low examination rate of 8% last year and the projected 10% examination rate for the current year. Using recent examination rates as a barometer, the typical federally registered investment adviser can expect to be examined only once every 12 to 13 years. Moreover, approximately 40% of federally registered investment advisers, or two out of every five, have never been examined.

The group’s letter to Congress underscored that a user fee provides a funding source that impacts neither taxpayers nor the federal treasury. H.R. 1627 contains a number of meaningful safeguards that ensure that the fees will be collected and deployed in a manner consistent with Congressional intent. For example, the bill:

  • mandates that any fees collected be dedicated solely to an increased level of adviser examinations by the SEC;
  • requires the SEC to develop its fee formula through a public notice and comment rulemaking;
  • requires the SEC to consider, among other things, factors such as the size of an adviser, the adviser’s assets under management, and the adviser’s risk profile in determining a fee; and
  • requires the Comptroller General to conduct a biennial audit of the SEC’s use of fees.

SEC Chair Mary Jo White has stated that, due to a lack of resources, the SEC is unable to “enforce compliance with the securities laws in a way that investors expect and deserve.” In November, the agency’s Investor Advisory Committee recommended that the SEC request user fee legislation from Congress. The recommendation noted that the current level of examination “is simply inadequate to detect or credibly deter fraud” and that the SEC
cannot “enforce compliance with the securities laws in a way that investors expect and deserve.”

Financial Planning Coalition Statement on Obama Administration’s Opposition to H.R. 2374

WASHINGTON, D.C. – The Financial Planning Coalition issued the following statement regarding the Obama Administration’s opposition to H.R. 2374:

“The Financial Planning Coalition applauds the Obama Administration in standing up for American investors by stating that it would recommend the President veto H.R. 2374, the dubiously titled bill ‘Retail Investor Protection Act.’ If it were to become law, this legislation would have a chilling effect on crucial rulemaking efforts for both the SEC and the Department of Labor in extending the common sense ‘put the client first’ fiduciary standard of care and continue to leave American investors without important protections. By making clear its opposition to this legislation, the Administration is putting American investors first.”

Financial Planning Coalition Opposes H.R. 2374: “Investor Protection Bill in Name Only”

Letter to Congress Urges Opposition to Bill that will Impede the Implementation of a Fiduciary Standard 

WASHINGTON, D.C. – In a letter sent today to all Members of Congress, the Financial Planning Coalition urges them to oppose H.R. 2374, the Retail Investor Protection Act, which would delay, or even prevent the U.S. Securities and Exchange Commission (SEC) and the Department of Labor (DOL) from developing fiduciary rules crucial to investor protection.

“H.R. 2374, which is an investor protection bill in name only, would prevent [the SEC and DOL] from engaging in rulemaking crucial to investor protection and would leave American investors more vulnerable to potential abuses,” stated the Coalition – comprised of Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association® (FPA®) and the National Association of Personal Financial Advisors (NAPFA).

The Coalition letter goes on to conclude: “The Coalition views H.R. 2374 as a ‘back door’ attempt to undermine investor protection provisions in Dodd-Frank and to prevent the SEC and DOL from proceeding with investor protection rulemakings consistent with appropriate cost-benefit analyses and routine inter-agency coordination.”

The Coalition emphasizes the consequences the bill would create for investors, noting that the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to establish a single uniform fiduciary standard of conduct for both broker-dealers and investment advisers. The passage of H.R. 2374 “would substantially impede or completely prevent the SEC from proceeding with a congressionally authorized and long-needed rulemaking that would allow all investors to receive investment advice that is based on their best interests,” the Coalition writes.

The Coalition cautions that the proposed legislation would needlessly slow DOL’s fiduciary rulemaking under the Employee Retirement Income Security Act (ERISA), prohibiting DOL from adopting a fiduciary rule under ERISA until 60 days after the SEC has adopted a final uniform fiduciary rule, effectively preventing DOL from implementing its own regulations should the SEC decide not to proceed with its own rulemaking.

Study Shows Advisers, Clients Benefit from a Fiduciary Standard without Reduced Access to Services or Increase in Costs

In letter to SEC, Financial Planning Coalition Opposes a Weakened Fiduciary Standard

WASHINGTON, D.C. – In a letter to the Securities and Exchange Commission (SEC) submitted July 5, the Financial Planning Coalition said it would “vigorously oppose” attempts to weaken the fiduciary standard and submitted research showing a client-first standard does not limit advice to “mass market” clients. The study also revealed that broker-dealers working under a client-first standard experience greater success compared to those operating under a suitability standard and without a significant increase in their costs.

The study – conducted by the Aité Group – was part of the Coalition’s response to the SEC request for information (RFI). The letter and study can be found here. A fact sheet with highlights of the study can be found here.

In its letter, the Coalition – which is comprised of Certified Financial Planner Board of Standards, Financial Planning Association and the National Association of Personal Financial Advisors – stated that a “fiduciary standard will benefit retail customers or their financial advisers, and will not impose significant costs.”

“The ‘best interest of the customer’ standard should be the key feature of any uniform fiduciary standard of care,” the Coalition stated in its letter. “However, the RFI does not adequately recognize this central concept … Indeed the standard contemplated in the RFI is little more than the existing broker-dealer suitability standard supplemented by some conflict of interest disclosures.”

The Coalition reiterated its view that the current assumptions made by the SEC would “significantly weaken the fiduciary standard for SEC-registered investment advisers while adding few meaningful new protections for retail customers.”

“We vigorously oppose such an approach, because it would have negative consequences for retail customers,” said the Coalition, urging the SEC to promptly propose a uniform fiduciary standard that is consistent with the existing standard required under the Investment Adviser Act of 1940.

Other key points of the Coalition letter include:

  • The RFI’s focus on enhanced disclosure suggests that such disclosure is sufficient for fiduciary standard. While disclosure of conflicts of interests is a beneficial and important step, disclosure alone is not sufficient to discharge an adviser’s fiduciary duty.
  • The Coalition letter identifies specific issues with the RFI’s assumptions and proposes an alternative set of assumptions for a uniform fiduciary standard consistent with Dodd-Frank and the Advisers Act.
  • The alternative standards of conduct and approaches discussed in the RFI are inconsistent with Section 913(g) of the Dodd-Frank Act.
  • The SEC should address harmonization of investment adviser/broker-dealer rules after it adopts a uniform fiduciary standard of care: the two issues are conceptually distinct and should not be linked.

The research submitted as part of the comment letter also indicates that “applying a uniform fiduciary standard on broker-dealers will have little if any effect on the availability of advice to customers.”

Those surveyed reported that broker-dealers who are already operating under the fiduciary standard “experience stronger asset growth, stronger revenue growth, and obtain a greater share of client assets than those that provide services primarily under a non-fiduciary model.”

The research also revealed:

  • A majority of brokers and advisers are already operating under a fiduciary standard.
  • Those brokers and advisers agree that the standard should apply when giving advice to retail consumers and that requiring this client-first standard has very little impact in deciding whether to serve “mass market” clients.
  • Conversion of fee-based brokerage accounts to fiduciary accounts shows that a fiduciary standard does not lead to increased costs or decreased services.