Archive for February, 2013

SEC Announces 2013 Examination Priorities

Friday, February 22nd, 2013

The SEC published its examination priorities for 2013.  The release covered priorities for all types of financial services firms.  Those that may impact independent investment advisers include:

  • Presence exams for newly registered private fund advisers.
  • Safety of assets and compliance with custody requirements.
  • Conflicts of interest related to compensation arrangements.
  • Marketing and performance advertising.
  • Conflicts of interest related to allocation of investment opportunities.
  • Dually registered adviser / broker-dealers.
  • Compliance with the pay to play rule.

The full release can be found here http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2013.pdf

A rising leader on the banking committee is pushing the SEC for a uniform fiduciary duty

Friday, February 15th, 2013

InvestmentNews reported that Senator Jon Tester of Montana, recently appointed chairman of the Senate Banking Subcommittee on Securities and Insurance and Investment, encouraged SEC Chairman Elisse Walter to focus on a uniform fiduciary duty for brokers and investment advisers during a hearing on the implementation of Dodd-Frank.  Ms. Walter responded: “My own personal view is that it’s the right thing to do, and we should proceed [and] perhaps at the same time take a hard look at the different rules that are applicable to the two different professions — investment advisers and broker-dealers — and see where they should be harmonized.”

This is certainly not the first time this idea has been floated.  While seemingly popular among Congress, the idea has not had much traction elsewhere, in part because the SEC is overwhelmed by the requirement to promulgate close to100 rules, pursuant to Dodd-Frank.  Further, the fiduciary standard regulation has split the Commission as well as the industry.  While investment advisers must act in the best interests of their clients when providing investment advice, brokers have a less stringent requirement to meet the suitability standard.  The general concerns are that the cost may be prohibitive and the potential that a uniform standard would serve to water down the investment adviser standard already in place, hurting consumers.

MarketCounsel remains wary of the possibility of “harmonizing” investment adviser and broker-dealer rules.  Much of the harmonization discussed by the SEC would be more burdensome on advisers than broker-dealers.  Furthermore, we believe that advisers would lose a strong marketing tool if broker-dealers are held to the same fiduciary duty as advisers.

MA Officials Push for Ban on Mandatory Arbitration Language in Advisor Contracts

Friday, February 15th, 2013

According to IA Watch, a recent study conducted by Massachusetts securities officials shows that nearly half of MA RIA’s include binding, pre-dispute arbitration clauses in their advisory contracts. Secretary of the Commonwealth William Galvin has found this to be of great regulatory concern, claiming that the practice is inherently inconsistent with the fiduciary duty an adviser owes their client.

This week, Galvin appealed to SEC commissioners and urged them to invoke their Dodd-Frank powers to address the matter. Section 921 of Dodd Frank gives the SEC the authority to investigate the practice of mandatory, pre-dispute arbitration, and if found to be a matter of public interest, make any necessary reforms accordingly.

Citing MA’s study results, Galvin has called for an all out ban on the practice.  MarketCounsel finds it interesting that Secretary Galvin is pushing the SEC for this decision, when MA does not prohibit the practice of state registered advisers.

Top Reasons Why CFP’s Avoid Social Media

Friday, February 15th, 2013

IA Watch reported on a survey of 3,532 Certified Financial Planners recently conducted by the Certified Financial Planner Board of Standards.  The survey reveals that, despite the fact that almost three quarters of them use social media in their daily personal lives, a majority of the CFP respondents are resistant to the idea of leveraging it for professional purposes. The top reason cited is compliance prohibitions or limitations.  Other key reasons  include uncertainty over compliance requirements and lack of time.

The survey also revealed that 7 in 10 respondents’ firms currently maintain a formal social media policy, and that those firms’ compliance departments are more likely to ban Facebook above all other social media platforms. The platform ranked most popular for professional use was LinkedIn.

FINRA Scaling Back Efforts to Lead RIA Oversight…For Now

Friday, February 15th, 2013

Last Thursday, FINRA’s Chairman Richard Ketchum announced to Reuters that the agency will for the time being scale back its campaign to take over the reins of the regulatory oversight of registered investment advisers from the SEC. The move comes in the wake of the 2012 National election results, as leadership and legislative agendas have shifted within the House Financial Services Committee. FINRA stated that while it still perceives the under-resourced SEC’s enforcement capabilities as a “critical investor protection issue” that “should be addressed as soon as possible”, the new Congressional agenda forced it to change the direction of its focus to other concerns.

Although the agency’s pursuit will be put in a temporary holding pattern, Ketchum reaffirmed that the move does not mean that the agency will not give it a second look in the not-too-distant future.

SEC faces a potential budget cut of more than $100 million

Thursday, February 7th, 2013

Earlier this week, Barack Obama petitioned Congress to delay automatic spending reductions, scheduled to go into effect March 1. President Obama expressed concern over the economic consequences of these cuts and suggested that if Congress does not pass a comprehensive deficit reduction plan to replace these cuts, known as sequestration, it should look to pass a package of alternative spending reductions and tax increases. Should these automatic cuts go into effect, they will include more than $100 million from the SEC’s budget. These cuts were originally set for January 1 but as part of measures to avoid the fiscal cliff, Congress delayed the sequestration two months and reduced the sequester amount. The issue may be exacerbated by the political standoff between President Obama and Capitol Hill Republicans who dismissed the President’s proposal. Similar to the battle over the fiscal cliff, the fight over sequestration may not be resolved until the eleventh hour.

As reported by InvestmentNews, a $100 million reduction, while not crippling, would likely hamper the SEC given the agency is already understaffed and overextended. The result would likely be budget cuts throughout the agency, slowdowns and employees placed on unpaid leave or even agency-wide layoffs.

CFP Board aims to up their certificants by 5% this year

Wednesday, February 6th, 2013

An Investment News article discussed that the Certified Financial Planner Board of Standards has launched a marketing campaign aimed at persuading investment advisers to become CFPs. The CFP Board has only recently engaged in direct marketing rather than marketing through education institutions that offer CFP courses. The article says that the campaign comes as no surprise as the Financial Planning Association and National Association of Personal Financial Advisors have sought to promote a “one profession, one designation” initiative.

SEC-Registered RIA Penalized for Inadequate Compliance Policies and Staff

Wednesday, February 6th, 2013

On January 29, 2013, IMC Asset Management, Inc., an SEC-registered investment adviser, entered into an Offer of Settlement with the SEC after having been cited for violations of the Advisers Act.  Specifically, the SEC fined the firm $30,000 for having failed to:(1) adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act; and (2) review at least annually its written policies and procedures and the effectiveness of their implementation.

From 2007 to 2010, IMC Asset Management had been operating its compliance program using a manual which had been drafted to address the business activity of its predecessor entity, a broker-dealer. The firm never updated its policies and procedures to address specific investment adviser compliance.  Moreover, there was no evidence that the firm’s named CCO had implemented any portion of the RIA’s compliance program.  IMC Asset Management had also failed to adequately address a series of noted deficiencies following a regulatory exam by the SEC.  As a result, the firm was sanctioned $30,000 and issued a cease-and-desist order.

This appears to be a unique case as there were no allegations by the SEC of fraud against the RIA, and no evidence that any clients had been directly harmed as a result of the firm’s dysfunctional compliance program.

Link: SEC Order re IMC Asset Management