SEC Staff Says It Will Make Conflicts Of Interest Of Dually-Registered RIAs An Areas Of Focus Of RIA Examinations In 2013

Friday, March 01, 2013 09:51
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SEC Staff Says It Will Make Conflicts Of Interest Of Dually-Registered RIAs An Areas Of Focus Of RIA Examinations In 2013

Tags: compliance | RIA compliance | sec

 

The Securities and Exchange Commission is focusing inspections of RIAs on conflicts of interest that rise from being dually registered with a broker-dealer as well as an RIA. The agency says its staff is also focusing on undisclosed fee arrangements between advisors and mutual funds and custody rules.

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The SEC released its exam priorities every year “to communicate with investors and registrants about areas that are perceived by the staff to have heightened risk, and to support the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation.”
 
With the agency now responsible for examining 2000 newly registered hedge funds and private equity funds, the exam program remains under pressure to create a credible deterrent to fraud and incompetence by RIAs.    
 

 

Comments (4)

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brentb843
Is wrong, you need to update.

RIA exam focus is not a part of the release. It is the stating the broker-dealer that also has a wholly owned RIA. This has been a point for years few understood. Madoff got away with his scheme not because he had created an RIA, but because the RIA held all its ‘assets’ at his broker dealer. This speaks to greater oversight. Most RIAs use qualified custodians (ie, third parties).

The large point is if a broker-dealer has a dually registered advisor, what policy and procedures are in place so the investor knows which hat the ‘advisor’ is wearing. This is the big story, but you claim it is that RIAs have custody issues.

The top sentence you put inside the slideshare box is wholly misleading. Shame on you…..

B
brentb843 , March 01, 2013
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agluck
Brent, shame on you. If I reported something inaccurately, say so. But don't attack me, particularly since you appear to be incorrect. I've been at this too long and work too hard to be assaulted that way, and you know that.

The SEC staff says in the release "it is not uncommon for a financial professional to conduct brokerage business through a registered broker-dealer that she does not own or control and to conduct investment advisory business through a registered investment adviser that she owns and controls, but that is not overseen by the broker-dealer."

Maybe in some hair splitting way I cannot fathom I have said something wrong, but I don't see it. The SEC is going to focusing on dually registered RIAs who are affiliated with BDs, according to the agency release.

Having said all that, I do find it curious that the SEC is saying that the BD does not oversee the independent RIA's activities. Even if the rep has her own RIA, I was always told by compliance consultants that the BD supervises the RIA's activities.

I will be asking a compliance consultant to explain this.
agluck , March 01, 2013
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Chris Winn
"Having said all that, I do find it curious that the SEC is saying that the BD does not oversee the independent RIA's activities. Even if the rep has her own RIA, I was always told by compliance consultants that the BD supervises the RIA's activities. I will be asking a compliance consultant to explain this."

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FINRA implemented "outside business activities" rules (initially) to ensure that registered reps were not selling away and conducting unsupervised securities business, such as working for two B-Ds or selling private investments.

As the rules evolved, they became more about FINRA positioning than investor protection.

Reps have outside activities spanning every economic sector and conceivable line of business. FINRA is getting involved in the RIAs (under their rules ONLY) because they don't want to be left out of the equation as the industry shifts.

How many examinations of a registered rep's condo association, church, florist business or local government are performed each year? Not many if any at all? The reason is simple...

Neither FINRA not the B-D would have any means of participating in the cash flows where the rep is a treasurer of the condo association, a part-time, paid minister or a paid position serving their town.

The SEC is stating the B-D does not oversee these activities because they have absolutely no right to under the Advisers Act or state regulations. These are the rules that FINRA puts forth for their members. If you want to be a member follow their rules or find a better club.
Chris Winn , March 03, 2013
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brentb843
Andy - you added an editorial comment to the document above to make it look like the focus was on RIAs (IA Act of 1940) and NOT the combination of RIAs and Investment Companies (IC Act of 1940).

The next part is that you totally missed the whopper of bomb dropped. That the SEC is going to find out what policies and procedures are in place to differentiate brokerage and advisory accounts. THAT IS HUGE.

You need to delete the editorial insert in the document.
brentb843 , March 06, 2013

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