Archive for February, 2016

Hamburger says, ‘No, DOL Fiduciary Rule Not Driving Advisors Away From Firms’ to @ThinkAdvisor @Think_Napach

Friday, February 26th, 2016

A bigger issue for financial advisory firms than the pending DOL fiduciary rule: finding competent advisors and other personnel: Brian Hamburger (@HDelux).

The market for breakaway advisors “has never been more ripe,” but that’s not due to the Department of Labor’s fiduciary proposal, says Brian Hamburger, managing director of MarketCounsel, a consulting firm that helps those advisors set up their own RIA shops.  The rule, which could be finalized and issued as early as next month, is changing perceptions and increasing uncertainty in the advisor market, but it’s not the reason for advisors to leave a firm or remain there, says Hamburger.  Just as many advisors say the rule is a catalyst for departure as say that it’s a reason to stay put in their jobs, says Hamburger.  “It’s never that people are staying or going because of some impending regulatory decision because at the end of the day it’s not going to really disrupt their business,” says Hamburger. “They’re still going to carry on. They’re going to make minor modifications to their practice, but the decision to stay or go shouldn’t be hanging in the balance.”
Perhaps not, but Norm Champ, the former director of the Securities and Exchange Commission’s Division of Investment Management, told a Washington summit Thursday that the rule will cause brokers to exit the business.  Whether or not advisors and brokers leave firms, changes will be required once the rule is finalized. One primary change will apply to the sale of commission-based products such as variable annuities and mutual funds with 12b-1 fees for retirement accounts. (The DOL rule applies only to retirement accounts.).

The proposed rule requires that advisors act in the best interest of their clients, which would exclude the sale of many commission-based products unless the advisor and the client acknowledge any conflict of interest by signing a contract known as the best interest contract exemption. Exactly which products could still be sold with a BICE and which could not won’t be known until the final rule is out.  But even if there were no DOL proposal, some advisors may still feel uncomfortable about the pressure to sell their firm’s proprietary products, and feel they should be leaving anyway, says Hamburger. “This regulation is just the weather of the day.”

A bigger issue for advisors than the pending DOL rule is “finding the right people to fill different roles within their firms,” says Hamburger. “Recruiting is far and away a much bigger problem than anyone is writing about now. There’s a real competency gap.” He says firms are having a difficult time filling all sorts of jobs, including positions for advisors, support staffers and management. “It’s complicated,” says Hamburger. “The skill set that’s required to fill a role in this day and age is a lot more complex than what it used to be.”
And that will likely get even more complicated once the Department of Labor’s final fiduciary rule is issued.

Read more.

FINRA Arbitration Proposed Changes

Wednesday, February 24th, 2016

Rounding out 2015, FINRA’s Arbitration Task Force issued its Final Report regarding improvements to the SRO’s arbitration of customer cases. Despite its focus on such cases, many of the changes recommended by the Task Force easily impact industry related disputes as well. Agreeing on 51 recommendations, the most significant relate to improving confidence in arbitrator qualification and perceived confidence in the forum.

Intended to improve the arbitrator pool, the Task Force cited FINRA’s below-market-rate compensation as its major challenge. Conceding FINRA could not bring its arbitrator compensation in line with non-SRO forums such as the AAA (widely respected to offer generally high quality arbitrators), it sought to couple its recommended modest increase, with a robust recruitment effort based on gender and race based qualifications. Notably, none of the recommendations focused on improved screening of arbitrators to identify augmented skill sets advantageous to actually improve their qualifications.

Taking another indirect path toward improving the quality of decision making, and increased consistency among awards, the Task Force recommended increased use of explained decisions. Currently, explained decisions must be requested by all parties to a case, and are used in less than one percent of eligible cases. However, the report concedes that before implementing such a change, arbitrator’s competency to write such decisions could be a challenge. (One would think they would look to actually improve the arbitrator pool to overcome the issue.)

To streamline discovery in customer initiated cases, the report urges that all insurance policies that may provide coverage of a claimant’s claim be presumptively discoverable. This was seemingly conceived in a vacuum, and places the disclosure of policy limits ahead of any finding of liability, substantially impairing the ability to effectively negotiate settlements, particularly where multiple claims are made against the same policy.

As FINRA gains momentum increasing public awareness of BrokerCheck, more brokers use FINRA’s arbitration forum to expunge (or clean up) their records. The Task Force report disclosed that FINRA and NASAA are in the process of exploring whether to convert the expungement process into a regulatory procedure. While that likely won’t make it any easier to clean up damaged records, for now, the Task Force recommended a specially trained pool of arbitrators handle expungement cases. A bright spot of the report, at least they were recommending training.

SEC Chair White Discusses Third-Party Reviews of Advisers and Uniform Fiduciary Rule

Monday, February 22nd, 2016

SEC Chair Mary Jo White recently discussed two issues that are important to investment advisers.  At a Practising Law Institute conference, Ms. White stated that “I will continue to work to develop support from my fellow commissioners for a uniform fiduciary duty for investment advisers and broker-dealers, and to bring forward a workable program for third-party reviews to enhance the compliance of registered investment advisers.”

No timing was given on either initiative, and the SEC is currently down two commissioners, so we can assume that rulemaking will not occur in the near future.  The statements do, however, show what Ms. White is currently favoring.  She has typically been reluctant to show her cards on these issues.

House Approves Expanding Accredited Investor Definition

Wednesday, February 3rd, 2016

In a move that is somewhat counter to what the Investor Advisory Committee of the SEC proposed, the House of Representatives approved legislation that would expand the definition of accredited investor.  The legislation would not lower the current financial thresholds that are in place, but instead would allow individuals with a securities license or professional knowledge and experience related to the security the wish to invest in.

Accredited investors are allowed to invest in privately placed securities that have less oversight than public securities.  The Investor Advisory Committee asked the SEC to update the definition, which has not been substantially changed in a number of years.

The bill’s author Rep. David Schweikert, R-Ariz said that the legislation would democratize investing in emerging companies.  In a quote found in InvestmentNews, Mr. Schweikert said that “in America today, some of the greatest investment opportunities are available only to those who meet a certain wealth threshold.  With passage [of his bill], Congress took a step towards expanding investment opportunity to include hard-working Americans with sophisticated professional experience. In today’s hyper-efficient economy, that expansion opportunity is a key part of driving economic growth.”

It’s interesting to watch the ebb and flow between loosening and tightening financial regulation (see the JOBS Act vs. Dodd-Frank).  The political opinion seems to depend upon whether someone is trying to get money to small business to help the economy and those reacting a financial scandal.

It should be noted that the legislation does not change any current definitions or ability to invest in private securities.  Also, considering that most private placements continue to avoid the public solicitation allowed by the JOBS Act because of additional responsibilities, it’s hard to imagine that companies will want to judge who has “professional knowledge related to the security.”