I’m attending a conference sponsored by IA Watch: Coping with Regulatory Change. These are my brief notes.
Norm Champ, Investment Management Law Lecturer at Harvard Law School and former SEC IM Division Director, New York; and Robert Plaze, Partner, Stroock & Stroock & Lavan, Washington, D.C. came ready to talk about a broad range of issues.
Form ADV proposed changes and Form PF changes. These changes are all about getting better data and better understanding risks. The comment period just closed, but re-opened for the liquidity proposal. IA-4091 and 33-9776 will continue as other rules are proposed. The SEC has identified separate accounts as an area in which the SEC has little insight.
The next question is what is the SEC going to do with this data. Can the SEC keep information confidential? What happens if the SEC has the data showing the problem but does not see it? The SEC is concerned about disclosing the positions of investors being advised by registered investment advisers.
Other rule-making under consideration:
- Liquidity in funds has moved ahead: (33-9922).
- Derivative use in funds is another item.
- Transition plans for advisers.
- Stress tests for advisers and funds.
The Fiduciary Duty is the “keystone pipeline” of the SEC. It will not be able to go far enough to make investor advocates happy and will go too far for the brokerage industry. There are too different models, investment advisor and brokerage, clashing in the area of wealth management. There is also a clash with the Department of Labor who has proposed its own rule that applies to all retirement plans. There is a calsh between the disclosure model and the strict standard model.
The panel pointed out the problem with third party compliance audits is that there is no equivalence to GAAP. Public companies are subject to audits subject to GAAP. The problem with using this model for compliance is that there are no generally accepted compliance standards or practices that would, at least in part, standardize the compliance audit practice. For settlements that require a third party compliance audit, the settlement often rejects proposed compliance consultants because they lack credentials.
The panel equated third-party compliance exams to credit rating agencies. There was little regulatory oversight, with an industry mandate, and they did bad job rating. They played a big role in the 2008 financial crisis.
FinCEN has proposed a rulemaking for AML for investment advisers. FinCEN is not receptive to comments saying there should not be checking for terrorist money use.
Transition planning will likely be tackled after derivative use. To some extent its the next step after disaster recovery plans and business continuity planning. It’s a bigger issue given the scope of different firms and business models for investment advisers.
Dodd-Frank does have a statutory mandate for stress tests of advisers and funds. Of course the question is how you stress test an adviser given that an advisers capital should affect the client’s portfolio. Assets are supposed to be held by custodians, not the adviser.
