Register For Free For SEC Seminars For RIA Compliance Chiefs In Chicago, New York, Atlanta And San Francisco
Wednesday, July 17, 2013 15:54

Tags: client education

The Securities and Exchange Commission announced the schedule for its upcoming Compliance Outreach Program regional seminars in Chicago, New York, Atlanta, and San Francisco for investment adviser and investment company senior officers, including chief compliance officers (CCOs). Here's the online registration form for the free in-person seminars. 

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The sessions are not being broadcast as webinars and must bes attended live and in-person, and you have to wonder why. This information should be as widely disseminated as possible. 


The SEC's Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement's Asset Management Unit are jointly sponsoring the regional seminars. The seminars highlight areas of focus for compliance professionals. They provide an opportunity for the SEC staff to identify common issues found in related examinations or investigations and discuss industry practices, including how compliance professionals have addressed such matters.
The Compliance Outreach Program was created to promote open communication on mutual fund, investment adviser, and broker-dealer compliance issues. The program, formerly known as the CCOutreach Program, was redesigned in 2011 to include all senior officers, not just CCOs, underscoring the importance of compliance throughout a firm's business operations.
The series of regional seminars kicked off in Boston on May 16 with panel discussions on the priorities for the SEC's National Examination Program, current topics in money management regulation, and OCIE's process for assessing risks and selecting firms for examination.
The remaining seminars:
  • Chicago - August 28: This seminar will present an overview of the examination process, including how registrants are selected for examination and the most commonly identified deficiencies. There also will be three discussion panels on traded and non-traded real estate investment trusts, on investment companies with special emphasis on alternative investment funds and money market funds, and on current enforcement actions in the investment management industry. Lastly, there will be a breakout session focusing on custody and compliance for small advisers. Register for this event
  • New York - September 13: This seminar will be most relevant to newly registered investment advisers, to dual registrants and to investment advisers affiliated broker-dealers. The topics most relevant to newly registered advisers will include the SEC's examination process, priorities, risk surveillance, and examination selection process. In addition, the staff will discuss Form PF and other filing requirements and recent industry and regulatory developments. The topics most applicable to dual registrants or advisers with affiliated broker-dealers will address the staff's coordinated examination process, common examination findings, and controls that some firms use to address conflicts of interest. Register for this event
  • Atlanta - September 25: This seminar will discuss the importance of enterprise risk management and effective compliance and will identify key issues noted during examinations, including conflicts of interests and issues associated with fees, such as undisclosed remuneration, miscalculation, and layering. Additional discussion topics include the changing demographics of SEC-registered investment advisers and key examination program initiatives to address such changes. Register for this event
  • San Francisco - November 6: This seminar will feature an overview of the SEC's examination processes and procedures and a discussion of OCIE and AMU priorities. Emphasis also will be placed on valuation issues, including best practices for valuing assets by private and registered investment funds. Register for this event

If registrations exceed capacity at an event location, investment company and investment adviser CCOs will be given priority on a first-come, first-registered basis. Instructions on registering for the regional seminars will be sent to each SEC-registered investment adviser using the e-mail account on the adviser's Form ADV filing. For more information, contact: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Summarizing The Current Position Of Stakeholders In Decision On Naming FINRA To Oversee RIAs
Sunday, June 23, 2013 15:16

Tags: Dodd-Frank | fiduciaries | FINRA

As Congress and the SEC near a time for reckoning on implementing Dodd-Frank reforms in the regulation of investment advisers, Wall Street, RIAs, FINRA, and other stakeholders are digging in their heels and readying for a Washington, D.C. showdown. 


With that dramatic backdrop, Mark Schoeff wrote a solid piece of reporting in today’s Investment News profiling FINRA. Schoeff provides a balanced appraisal of the self-regulatory-organization (SRO) landscape in the financial services industry.


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Schoeff quotes Tamar Frankel, an esteemed securities law professor at Boston University School of Law, attacking FINRA’s credibility as a regulator. “It (FINRA) is built on its membership,” Frankel is quoted as saying. “Whenever brokers really care [about an issue], and FINRA goes against them, they will trump FINRA.”
FINRA's executive vice president of regulatory operations,, Susan Axelrod, responds to Frankel’s highly disparaging remarks saying, “We can be informed by the industry, but in no way are we instructed by them.”
That's great reporting and it really lays out the different players and their positions succinctly.
Schoeff shows how the 2007 merger of FINRA with the New York Stock Exchange was the beginning of a push to create an SRO that would oversee all financial advisors. Then, David Tittsworth of the Investment Advisers Association is quoted saying the merger “has created a large organization that is intent on growing further and extending its jurisdiction to investment advisers.”
This is a great piece of reporting that summarizes the current position of FINRA on overseeing investment advisers.
When you read a story like this, it makes you understand why FINRA remains likely to ultimately be named as the SRO overseeing RIAs.
I’m not saying FINRA should get the responsibility for regulating RIAs, but it is a convenient solution and it does have the bureaucratic heft to do it. Also, I’m so jaded, I believe Congress gets bought and won’t ever shut down Wall Street’s sales machine—even in the unlikely event a Congressman actually understands the issues well enough to know why it would be bad for consumers and retirees for FINRA to be chosen as  the SRO of RIAs.
Wall Street remains incredibly powerful despite its prominent role in causing the financial crisis, and nothing much has been done to reform the investment advice business since the financial crisis.
That part was not in Schoeff’s story. He’s doing straight reporting. But I’d love to hear what he thinks.

Why Do So Few RIAs Accept Finra's Invitation To Administer Arbitrations With Clients? It Might Not Be Just Because They Don't Like Finra
Wednesday, May 29, 2013 14:53

Tags: compliance | FINRA | RIAs

Finra, the brokerage industry regulatory body, opened its arbitration system up for RIAs to use in October 2012, but few RIAs have taken Finra up on its offer, even though it would cost less than conducting the arbitration through the American Arbitration Association.

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"Finra's arbitration fees are considerably lower than those of the AAA and others, and there was speculation that would attract investment advisers," reports The Wall Street Journal. However, RIAs have so far given Finra a cool reception.


WSJ quotes an AAA spokesperson saying it conducts several hundred client-RIA arbitrations annually, but just four RIAs have used Finra's abritration facilities since they were opened to RIAs in October.


Why are so few investment advisors using Finra's arbitration system when filing a claim through the AAA typically costs much more? While you may think it is because RIAs hate the notion of being regulated by the compliance organ established and dominated by Wall Street, the WSJ report says there may be another explanation.


A compliance attorney quoted in the WSJ article said he believes RIAs use the higher expenses of forums other than Finra "to economically intimidate customers." The filing fee in the AAA could be as much as five times the fee in Finra's forum, he noted.  








Massachusetts Settles Allegations With Five Independent Broker Dealers For Improper Sales Of Non-Traded REITs, Returning Over $11 Million To Investors
Thursday, May 23, 2013 11:08

Ameriprise, Commonwealth Financial, Lincoln Financial, Securities America and Royal Alliance yesterday settled charges and agreed to a censure by the Commonwealth of Massachusetts for selling non-traded real estate investment trusts that amounted to more than 10% of the liquid net worth of Massachusetts residents.

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The five BDs agreed to make restitution totaling $11 million to Massachusetts investors and agreed to take action to prevent further violations of rules regarding sales of alternative investments.

It will be interesting to see if laws like the one in Massachusetts to avoid highly sales of concentrated positions in alternative investments have been adopted in other states because that presumably could trigger additional actions by other states. According to the complaints filed by the state:
  • Ameriprise sold the REITs in 54 transactions with Massachusetts residents worth about $2.5 million in violation of the state’s net worth requirement.
  • Commonwealth sold the REITs in 42 transactions with Massachusetts residents worth about $2.1 million in violation of the state’s net worth requirement.
  • Lincoln Financial sold the REITs in eight transactions with Massachusetts residents worth about $500,000 in violation of the state’s net worth requirement.
  • Royal Alliance sold the REITs in four transactions with Massachusetts residents worth about $59,000 in violation of the state’s net worth requirement.
  • Securities America sold the REITs in 13 transactions with Massachusetts residents worthabout $778,000 in violation of the state’s net worth requirement.

Are Brokers Fiduciaries, Even Though They Accept Commissions? Yes, Says Financial Advice Ethics Expert Ron Rhoades
Wednesday, May 22, 2013 15:41

Tags: compensation | Dodd-Frank | fiduciaries | fiduciary standard

A lot of fee-only advisors think that advisors who accept commission compensation cannot be fiduciaries. That’s not necessarily true. Legal experts say the Securities Exchange Act of 1934 imposes a fiduciary obligation on brokers accepting commissions similar to the fiduciary standard under the Investment Advisers Act of 1940, and financial advice ethics experts Ron Rhoades published a pamphlet earlier this week saying that brokers are required to act as fiduciaries under state common law. Yet the issue continues to be highly contentious and has been the main sticking point separating Financial Planning Coalition and groups representing fee-only advisors from groups like Financial Services Institute, representing registered reps.

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With financial regulators and Congress wrestling with how to implement the Dodd-Frank Act, figuring out who should regulate RIAs, and being urged to consider creation of a single fiduciary standard that would apply to all financial advisors—fee-only and commission, I emailed Rhoades several questions about the obligation of commission-compensated brokers to act as fiduciaries. Below are Rhoades’ answers to my questions about how brokers can accept commissions and still be a fiduciary.  
Please elaborate on the issue of advisors accepting commissions and still owing a fiduciary responsibility to clients.
If commissions are agreed-to in advance with the client, are reasonable in amount for the services and advice provided, and no additional compensation to the broker results from the sale of the product (such as other forms of revenue-sharing arrangements), then the commission fee structure is essentially the same as paying an agreed-upon fixed fee for the advice to be provided, given the amount to be invested. However, difficulties exist with commissions, in several respects:
First, is the amount of the compensation reasonable? If all you are doing is recommending an asset allocation to the client, and picking mutual funds, and if you charge 4% of $1,000,000 invested across multiple fund complexes, these acts might very well result in unreasonable compensation for the services provided. In each case, expert testimony is required to examine the services provided, and to determine whether the fee is “reasonable” under the fiduciary standard for the advice which is provided. There are many, many different circumstances in which brokers are currently operating on a commission basis, where the compensation might be viewed by an expert as unreasonable.
Second, have you as a fiduciary limited yourself too much, in terms of the products being able to be accessed? Dodd-Frank permits a broker, if the fiduciary standard is applied, to have a limited range of product offerings. Even then, the SEC may place limits on this practice.
Third, have you avoided all differential compensation? As stated above, differential or variable compensation is difficult to defend under the “best interests” fiduciary standard, and likely prohibited under ERISA’s tougher “sole interests” fiduciary standard.
You say, "Commission‐based compensation is not, in and by itself, contrary to fiduciary principles, provided the commissions do not vary with the advice being given and provided that the compensation received by the advisor is reasonable for the services provided." What do you mean about commissions varying with the advice being given?
Technically, the “best interests” fiduciary standard of conduct does not prohibit commission-based compensation, nor does it prohibit additional compensation being paid to the fiduciary from a third party. In theory, there is nothing different from a flat fee being charged for one-time investment advice, versus a commission; the only difference is how the fee is computed (not necessarily the amount), and who pays it (either way, it results in a payment from the client, whether direct or indirect).
The problem arises when the amount of compensation varies depending upon the advice which is given. For example, if one product pays a fiduciary 6%, plus 0.25% trailing fee indefinitely, while another product pays a fiduciary only 4% with no trailing fee, then the fiduciary has a financial incentive to recommend the higher-cost product. In this respect, the fiduciary bears the burden of demonstrating, in a court of law (or arbitration), that the client is not harmed by paying a higher fee. Since substantial economic evidence demonstrates that higher-fee products possess, on average, lower returns, it becomes very problematic for the fiduciary to try to justify his or her actions.
Given the higher attention being paid by litigation attorneys to fiduciaries who recommend (or, in the case of plan sponsors, approve the selection of) higher-fee-and-cost products, it is only a matter of time before some client of a fiduciary would challenge the fiduciary in an arbitration or legal proceeding. In my mind, the better way is to avoid the conflict altogether. Specify and agree with the client on the amount of compensation to be paid, in advance of any recommendation being undertaken. Then adhere to that amount of compensation.
Of course, the business practices of Wall Street will be forced to change, under a levelized compensation approach. Gone will be the insidious practices of payment for shelf space (a type of “pay-to-play” arrangement), soft dollar compensation, and other compensation structures which result in the fiduciary (individual or firm) receiving greater total compensation as a result of recommending X product, instead of Y product.
Even fee-only advisors possess conflicts, however, which may cause differential compensation. The classic examples involve whether to purchase a fixed immediate annuity, or to pay off a mortgage or other debt. In both instances, a fee-only advisor whose fees are based upon the amount of investment assets managed would possess a conflict of interest. In these instances, fiduciary advisors must be very careful to justify the advice that they provide. There may be solid reasons to not purchase an immediate annuity for a client who is retired (there are many factors at play). There may be good reasons to not pay down a mortgage (due to deductibility of interest, possible low interest rate being paid relative to returns obtained in the capital markets, etc.). This is a case where the conflict of interest is unavoidable, and must be properly managed. Fee-only advisors are to be applauded for avoiding commission-based compensation, and other third-party payments, which can result in conflicts of interest. Yet, fee-only advisors may, in some instances, still possess a conflict of interest, which must in such instance be properly managed.
If an advisor can accept commissions and still be a fiduciary under ERISA, can a broker be a fiduciary on nonqualified assets?
Yes, and the broker is probably already a fiduciary. Most brokers, I would observe, are already fiduciaries under state common law.
And are you saying that the broker is a fiduciary under the ‘34 Act?
Not under the ’34 Act. But, rather, fiduciary status arises under state common law. Here’s the key. A person registered under the ’40 Act, and operating as an investment adviser, is automatically a fiduciary. At the time the 1940 Investment Advisers Act was adopted, everyone thought it imposed fiduciary duties. (The U.S. Supreme Court only confirmed that fact, in its seminal 1963 Capital Gains decision.)
A person registered under the ’34 Act may be, and often is, still a fiduciary. It was commonly known (and stated by NASD, now known as FINRA, and by the SEC, in the early 1940’s) that brokers were fiduciaries when they provided personalized investment advice—i.e., when they formed a relationship of trust and confidence with the client. Fiduciary status results not from the application of the ’40 Act (which relates only to whether registration is required), but due to the application of state common law.
The ’34 Act, unlike ERISA, does not preempt the application of state common law, as to the application of the fiduciary standard of conduct. Many, many brokers (and even some insurance agents) are found to be fiduciaries, applying state common law. In fact, the #1 complaint in arbitration proceedings against brokers in the past five years has been for “breach of fiduciary duty.”
When the ’40 Act was enacted, nowhere in the ’40 Act did it state that brokers were not fiduciaries. Indeed, it was commonly known at the time that brokers were fiduciaries when providing personalized investment advice—i.e., when in a relationship of trust and confidence with the client. And simply by the use of a title such as “financial consultant,” or a designation such as “financial planner,” the broker has taken the necessary step to invite the client into, and accept, a relationship of trust and confidence. Every instance is still a facts-and-circumstances analysis, yet most brokers – who pride themselves in knowing their clients, meeting with them regularly, etc. – have likely formed the relationship of trust and confidence which results in fiduciary status being imposed, as to those clients.
Can a broker get paid different commissions depending on the class of shares of a mutual fund and still be a fiduciary?  
Technically, yes under state common law and under the Advisers Act, but not under ERISA (unless the DOL grants exemptive relief in this area). Differential compensation under ERISA would violate its strict “sole interests” fiduciary standard and ERISA’s prohibited transaction rules.
For example, in the retirement space arena a mutual fund may have share classes which vary from R-1 to R-6. R-1 may have a 1.00% 12b-1 fee (which is passed on to the brokerage firm in a revenue-sharing arrangement), while class R-6 might have a 0.05% annual 12b-1 fee. Other classes would have fees in between. This permits the fiduciary advisor to negotiate, in advance with the client, what the fees to be received will be. (Even then, I think 12b-1 fees are fraught with problems, including anti-competitiveness.)
If the agent is being paid a straight commission, then the commission should be negotiated in advance between the fiduciary and the client. Any product which fits within that commission level can then be considered by the fiduciary. (A disclosure must be made that other products will not be considered by the fiduciary, and the ramification of that limitation should likewise be explained to the client). If, however, no agreement is made in advance with the client as to the maximum amount of commission to be charged, then the selection of a fund with a higher commission becomes problematic, for the reasons noted above.

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