Industry needs a clear set of regulatory priorities

Jul 13, 2014 @ 12:01 am

Your article about annuity sales (InvestmentNews, June 30) got me thinking.

As our industry responds to ever more rules by numerous rule-making bodies, I question whether investors are any safer than when there were fewer rules “helping” investors. Sadly, the explosion of more rules and more disclosures does not address the root issue and drowns it in minutiae.

The industry needs a clear set of regulatory priorities, for both firms battling to stay in compliance and those charged with enforcing the rules. For example, a system of levels for infractions could be enacted. A Level One offense, for example, would result in the immediate dismissal of the person and/or firm who committed the infraction. Level Two offenses would result in something less and so on. I think this would send a clear message to investment firms and to the investing public that serious infractions would not be tolerated.

If the industry were to put in a rule that forced advisers and brokers to use an independent, third-party custodian for all investments, I believe this most serious financial crime (stealing investor money) would be reduced dramatically. Alternatively, if a broker or adviser insisted on being his or own custodian, there should be a big warning label on the door of such firms for all potential investors to see, along with heightened audits, paid for by such firms.

How do we stop the “bad guys” from harming investors? We set priorities (Level One, Level Two, etc.) for compliance and for enforcement. Also, we implement safe harbors so that small firms with straightforward businesses and no custody of client assets would not use up disproportionate enforcement resources.

I have had personal experience with poor prioritization of enforcing compliance. In July 2010, after less than four months in business, the firm I manage, Golden Trail Advisers LLC, was audited for a full week by two employees from the SEC. After the audit, we were asked to address a few minor disclosures, which we did. Had there been clear compliance priorities, I believe the SEC could have been in and out in a few hours. While I did not mind the audit, I felt the SEC could have been looking into other firms with more potential for violations.

I have been in the investment advisory business for more than 16 years. There are more rules today than in 1998, but I don't believe investors' money is any safer. It is time to prioritize our compliance for both the investment firms and the regulators.

Mike Sedlak

Managing member

Golden Trail Advisers

Burr Ridge, Ill.

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