Ten regulatory moves advisers need to know

Oct 5, 2011 @ 12:01 am

By Liz Skinner

Rep. Spencer Bachus, an Alabama Republican and chairman of the House Finance Committee, is floating legislation that would establish one or more self regulatory organizations to oversee investment advisers. The draft was discussed at a Sept. 13 hearing in Washington where Financial Regulatory Authority Inc. Chief Executive Rick Ketchum said his group could develop a system to examine investment advisers, a task they already perform for broker-dealers. State securities regulators oppose any measure that takes away their role overseeing small advisers that register with states instead of the Securities and Exchange Commission. Independent investment advisers also reject the SRO concept and want the SEC to be allowed to charge user fees in order to pay for additional examinations. The draft bill hasn't been introduced yet.

The Securities and Exchange Commission is expected to scale back the definition of municipal adviser that it proposed in December when it issues a final rule. It has received mostly negative feedback among the 1,100 comment letters it received and the agency also faces congressional pressure. The Dodd-Frank financial reform legislation called for the regulation of individuals who advise municipalities in issuing bonds and investing the proceeds. Rep. Barney Frank, D-Mass. and co-author of the Dodd-Frank law, wrote the SEC in June to warn that the proposal had the “unintended consequence” of subjecting banks to “onerous regulation.” Rep. Robert Dold, R-Ill., introduced HR 2827, which seeks to narrow the definition of a municipal adviser. The Municipal Securities Rulemaking Board pulled back six proposed rules in September covering municipal advisers after concern the SEC's definition would include firms and individuals that wouldn't have had a chance to comment on the board's rules.

SEC Chairman Mary Schapiro said the commission will not seek a rehearing of the proxy access rule case that was decided in July by the U.S. Court of Appeals for the DC Circuit. That decision said the SEC failed to fully consider the economic impact of a rule requiring public companies, including investment companies, to include shareholder director nomination in proxy materials. That court ruling could be used against the SEC and the Labor Department as they work to develop and expand the fiduciary standard (see item below) that applies to those who give investment advice. Republicans already are calling for more economic analysis of the impact of financial regulations and Sen. Richard Shelby, R.-Ala., introduced legislation to require such a step. His S 1615 was sent to the Senate Committee on Banking, Housing and Urban Affairs.

Government efforts to craft fiduciary duty rules moved back two steps in September as the Department of Labor decided not to finalize its controversial proposed definition of fiduciary for retirement plan advisers. It will repropose an edited version early next year. At the Securities and Exchange Commission, an official said the agency will delay until next year a fiduciary rule proposal because of a cost-benefit analysis the agency was asked to conduct on the impact of extending the fiduciary standard.

In its last action of the month, the SEC warned brokers that it has concerns about trading through the sub-accounts because they can be manipulated to facilitate money laundering, insider trading, market manipulation and other financial shenanigans. Customers that open master accounts with a broker dealer often subdivide it so individual traders or groups of traders can use it and in some cases, the SEC said, the sub-accounts may be so divided that the customer and the firm where the account is held might not even know the identity of the traders in the sub-accounts. The commission's examination staff will “scrutinize the controls and procedures at broker-dealers” that offer these accounts, said Carlo di Florio, Director of the SEC's Office of Compliance Inspections and Examinations, whose national examination staff issued the alert. It includes recommendations for brokers to make sure they are complying with the SEC's Market Access Rule that requires procedures to limit the risk of offering market access to customers, including master/sub-accounts.

A flurry of legislation is under consideration to help small companies raise capital without having to meet the Securities and Exchange Commission's onerous and expensive public offering rules. Sen. Jon Tester, D. Mont., wrote S 1544 to allow companies to sell up to $50 million in shares without filing burdensome paperwork. Currently, only $5 million can be raised. Another effort is underway in Washington to allow small businesses to raise public funds over the Internet, known as crowdfunding. Rep. Patrick McHenry, R., N.C., proposed HR 2930 to allow companies to generate up to $5 million from individuals through crowdfunded securities, collecting a max of $10,000 per investor or 10% of their annual income, whichever is smaller. Pres. Barack Obama gave both these ideas the nod while pitching his jobs plan, though he would set a $1 million crowdfunding limit. For its part, the SEC set up a committee on small and emerging companies.

The Financial Industry Regulatory Authority Inc. published guidance reminding member firms that favorable research coverage can't be used to induce investment banking business. That includes “hints, insinuations or other subtle references,” Finra said. The brokerage self regulator also proposed changes in how the value of private REITs appear on client statements, namely making broker commissions more transparent. That proposal, which is open for comments through Nov. 12, is a challenge for independent broker-dealers that sell the non-traded REITs and those who sponsor them.

The SEC proposed rules aimed at protecting investors in asset-backed securities, such as those backed by residential-mortgage loans, commercial loans and student loans. The rule would block firms that package or sponsor asset-backed securities from participating in deals that conflict with buyers of those securities for one year. SEC Chairman Mary Schapiro said the rule is designed to make sure those who create and sell asset-backed securities “cannot profit by betting against those same securities at the expense of those who buy them.” It's not meant to interfere with traditional loan origination and packaging processes, she said. Comments are due Dec. 19.

In an effort to save social security, Rep. Thaddeus McCotter proposed HR 2889 that would replace up to 50% of each participating worker's retirement benefit with a personal savings account that could be invested in the market. The accounts would be offered to all workers aged 50 and younger. Participation would be voluntary and a minimum return on investment guaranteed. Social security trust funds would experience “significant relief” as soon as the first participants began retiring and benefits wouldn't be affected for current retirees, those who chose not to participate and workers older than 50, according to Mr. McCotter. The bill was referred to the House Ways and Means committee.

Sen. Jeff Bingaman, a New Mexico Democrat and member of the pensions committee, introduced S 1557 that would require firms with 10 or more employees and that don't sponsor a retirement plan to automatically enroll employees in individual retirement accounts. Under the Automatic IRA measure, similar to legislation Mr. Bingaman introduced in the last Congress, contributions would be voluntary and employees could opt out. In two other proposed retirement-related bills, S 1512 would expand the availability of employee stock ownership plans in S Corporations and HR 3045 would allow pension plans to use swaps to hedge risks.

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