FINRA Reissues Controversial Business Practice Rules Of 2010
Wednesday, February 20, 2013 09:07

Tags: FINRA | regulation | SIFMA

FINRA is reissuing a set of controversial rules for advisors. The original rules were issued in 2010 and comments signaled that the requirement for 30-days’ notice from its members for changes in a number of routine business activities was too far-reaching.

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The original rules demanded that FINRA receive advance notice of new products or services, increases in personnel after a certain threshold, notification of transactions involving 10% or more of a firm’s ownership, and changes in a firm’s service providers.
The changes would then be subject to a formal approval process by FINRA in an effort to prevent fraud at broker-dealers and their affiliates.
SIFMA urged FINRA to revamp the proposal and do away with many of its requirements. The Financial Services Institute Inc. (FSI) stated in a letter that the new rules would extend FINRA’s jurisdiction well beyond traditional limits.
The revision is said to include provisions to address regulatory issues FINRA has identified and to codify existing practices and interpretations.

SEC Chief, Testifying Before Senate, Says Dodd-Frank Replaced 2,250 RIAs And $115 Billion AUM With 1,500 New RIAs Managing $3 Trillion
Thursday, February 14, 2013 12:28

Tags: compliance | Dodd-Frank | RIAs

SEC Chair Elisse Walter, in testimony prepared for the Senate today, does not have much new to say about a regulatory solution for RIAs, which was mandated when the Dodd-Frank Act was passed in July 2010. But she offers up a scary fact about the regulatory mess the agency is facing.

“Since the Act became effective, approximately 2,250 formerly SEC registered advisers have transitioned to state registration and approximately 1,500 advisers to hedge funds and private equity funds have registered with the Commission,” says Walter in prepared remarks. “These new adviser registrants report over $3 trillion in assets under management, while those that transitioned to state registration manage about $115 billion.”

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SEC Chair Elisse WalterDodd-Frank was expected to ease the burden of RIA regulation on the agency by switching RIAs with less than $100 million AUM to state regulation. Before the switch, the SEC regulated RIAs with more than $25 million AUM and states watched over smaller RIAs. However, in requiring hedge funds and private equity funds to register as investment advisors, Dodd-Frank requires the agency tooversee activities of RIAs responsible for $3 trillion of assets it previously was not required to watch.


The terrible truth is that the 1,500 new RIA registrants the SEC must oversee manage 30 times as much money as the 2,500 small RIAs, and these new RIAs are probably 30 times more complicated to inspect.


“Most of these new registrants had never been registered, regulated, or examined and many have complex business models, investment programs and trading strategies,” Walter says. “Commission staff, through our National Exam Program, has developed and begun implementing a program for these new advisers which includes outreach, examination, and, ultimately, where appropriate, written reports highlighting exam findings.”


With sequestration looming, the SEC chief is asking for more government funding. The agency is asking for a FY 2013 budget of $1.57 billion, which would be a big hike over its FY 2012 budget of $1.32 billion and allow the SEC to hire 676 new staff.


Walter had little new to say about how to regulate RIAs. She is asking for more data from the public and industry on whether a uniform fiduciary standard for RIAs and registered reps should be adopted.


“While we have extensive experience in the regulation of broker-dealers and investment advisers, we believe the public can provide further data and other information to assist us in determining whether or not to adopt a uniform fiduciary standard of conduct or otherwise use the authority provided under Section 913 of the Dodd-Frank Act,” according to Walter. “To this end, the staff is drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. The request aims to seek information from commenters – including retail investors, as well as industry participants – that will be helpful to us as we continue to analyze the various components of the market for retail financial advice.”

Massachusetts Calls On SEC To Prohibit RIAs From Using Mandatory Arbitration Clauses, Saying It Is "Troubling," Widespread And Not Consistent With Fiduciary Practice
Wednesday, February 13, 2013 07:48

Tags: compliance | Dodd-Frank | fiduciaries | RIA compliance | RIAs | sec

The Secretary of the Commonwealth of Massachusetts, in a public letter, is calling on the U.S. Securities and Exchange Commission to prohibit Registered Investment Advisers from inserting mandatory arbitration clauses in their contracts, saying such clauses are widespread, not always in the best interest of consumers, and inconsistent with fiduciary practice.

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William Galvin, secretary of state of Massachusetts, revealed in the letter to the SEC that the Massachusetts Securities Division recently surveyed 710 state-registered Massachusetts investment advisers about their contracts and about half of them responded to the voluntary questionnaire. Of the approximately 350 responses, nearly half of the RIAs reported that their contracts contained a clause binding clients to arbitration of disputes.
“Such widespread use of mandatory pre-dispute arbitration clauses in advisory contracts is troubling and a cause for regulatory concern,” Galvin said in the letter. “By law, investment advisers are required to act as fiduciaries for their clients, with an obligation to act in their best interests. While arbitration may be appropriate in some cases, a clause binding an investor to arbitration before the circumstances are known may not be in the client's best interest nor consistent with an investment adviser's fiduciary duty.”
Galvin asks the Commission to ban pre-dispute arbitration clauses, saying he believed such a clause is “inconsistent” with an investment advisor’s fiduciary duty.
You can bet we have not heard the last of this, and for good reason. Mandatory arbitration for years has been a contentious part of brokerage firm account-opening applications. BDs won’t open an account unless you sign an arbitration clause. Dodd Frank legislation empowered the SEC in July 2010 to eliminate the practice by BDs but the SEC has not acted on this. Still, the mandatory arbitration clause has long been regarded as a heavy handed practice by BDs that consumer groups have opposed and the fact that many RIAs are inserting a clause like this in their contracts has to be a disappointment to pro-consumer fiduciaries who have long derided BDs for their sales practices.


Massachusetts Asks SEC To Ban RIAs From Using Mandatory Arbitration Clauses



POGO Report Shows Possible Influence Of Wall Street Executives On SEC Policy And Enforcement Decision Making
Monday, February 11, 2013 08:05

Tags: Morgan Stanley | regulation | sec

A report published by the Project on Government Oversight (POGO) just a few weeks after Mary Jo White was nominated to head the SEC shows that there was a revolving door between Wall Street executives and SEC staff.
A case study on money market fund lobbying shows how SEC staff that are now working in the private sector could have influenced the SEC’s ability to push through reforms in policy and enforcement over the past ten years.

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The report calls for reforms to help prevent such influence from continuing, saying the close relationship between regulators and those they regulate can impact the culture, the mindset, and the values of the agency.
Suggested reforms include requiring agencies to post disclosure statements online, the time frame for filing post-employment statements, and extending the cooling off periods for employees who enter and leave the government.
The report cites a long list of commissioners who questioned then SEC chair Mary Schapiro’s proposed reforms to money market funds.
Three commissioners refused to support putting the reforms out for comment.
The report also cites White’s appointment as another revolving door example, citing her hiring by Morgan Stanley’s board to determine whether John Mack, its prospective chief executive at that time, had any exposure to the SEC’s insider trading investigation into Pequot Capital Management.
Providing selective access to senior SEC officials during such an investigation caused the SEC to reveal small bits of information about a private investigation to a potential defendant’s prospective employer.


FINRA Puts SRO Priority On Back Burner, Noting Little Momentum In Congress In Support Of The Measure
Thursday, February 07, 2013 23:03

Tags: Congress | Dodd-Frank | FINRA

FINRA is putting its plans on hold to become the SRO to oversee investment advisors.
Noting that there seems to be little momentum in Congress to create an SRO to help the SEC examine more advisors on an annual basis, FINRA chief executive Richard Ketchum insists he is not giving up.

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He and backers for the SRO continue to assert it would increase investor protection by amplifying resources beyond the SEC’s current capacity.
A study mandated by the Dodd-Frank Act showed that the SEC could conduct annual examinations of only 8% of the 12,000 advisors under its watch.
After some adjustments made relative to Dodd-Frank, the SEC now oversees about 11,000 advisors.
FINRA examines its 4275 registered broker-dealers approximately once every two years.
FINRA has lobbied hard in Congress for two years to become the SRO but the effort died out after the Bachus-McCarthy bill failed to make its way to a vote.
Investment advisors are opposed to the SRO legislation, saying a new layer of regulation is unnecessary and costly.
FINRA may be rethinking its legislative priorities but advisors should not think the matter will simply go away.
FINRA has the backing of the Financial Services Institute Inc. (FSI), which says FINRA is reassessing the situation but is not giving up.
Since the SRO matter has moved down on the priority list, FINRA will likely focus on broker-dealer conflicts, structured products, and high-frequency trading.

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