The debate over issues related to the broker-dealer exemption rule continues.
On Oct. 1, the very day the rule died, industry participants and in-vestor advocates were debating whether stockbrokers should be held to a fiduciary duty when dealing with their clients and whether dually licensed advisers could effectively wear two hats.
At the annual meeting of the North American Securities Administrators Association Inc. in Seattle last Monday, Ira Hammerman, general counsel of the Securities Industry and Financial Markets Association of New York and Washington, in-sisted that stockbrokers are more heavily regulated than are investment advisers and that there is no need to extend a fiduciary duty to the brokerage business.
Washington-based NASAA represents the interests of state and Canadian provincial securities regulators.
Mr. Hammerman mentioned several cases of fraud by advisers and waved a notebook that he said is filled with examples of such cases.
“That's a red herring,” retorted Barbara Roper, director of investor protection for the Consumer Federation of America in Washington.
Ms. Roper, who is based in Pueblo, Colo., said that anyone who gives investment advice — including stockbrokers — should be held to fiduciary standards.
She added that she could fill her own notebook with examples of fraud committed by just one securities firm.
Advisers simply can't be fiduciaries on the one hand and salespeople on the other, said Ron Rhoades, who was also on the panel that focused on fiduciary issues.
Mr. Rhoades, chief compliance officer and director of research at Joseph Capital Management LLC in Hernando, Fla., concluded the presentation by dramatizing a meeting with a client in which he literally struggled to wear two hats, one in presenting an asset allocation plan as a fiduciary, and the other in selling a variable annuity as part of that plan.
Separately, at a meeting of NASAA's investment adviser section, Michael Huggs, senior securities analyst at Mississippi's Business Regulation and Enforcement Division in Jackson, said that state regulators are also wondering if in-vestment advisers can “ever stop that fiduciary relationship, even temporarily. We're struggling with that issue.”
Mr. Huggs also released the results of an analysis of investment adviser exams done by state and provincial regulators, which uncovered areas where small investment advisers are getting tripped up by rules.
The study looked at exams of 418 advisers conducted between January and May. Of those, 389, or 93%, had at least one deficiency. The average advisory firm — excluding those in Canada, which has no asset maximum for provincial regulation — had 47 accounts managing a combined $8 million in assets.
States regulate advisers with $25 million or less under management. The Securities and Exchange Commission is responsible for larger advisers.
State and provincial regulators found 2,135 deficiencies in all.
Among advisers with deficiencies, the most common problem area was registration records, with 71.3% of the problem group having some kind of failure regarding their registration requirements.
Among the most common registration issues: a failure to complete or update ADV forms, Mr. Huggs said.
State examiners recently ob-tained better technical tools that allow them to compare different parts of ADV forms for inconsistent data, he added.
Inconsistencies sometimes occur when advisers share ADVs and client agreements with colleagues, said Nancy Lininger, a Camarillo, Calif.-based compliance consultant.
“An adviser will pick something he likes from one ADV and something else he likes from another firm's agreement — without thinking that they don't jell,” she said.
State and provincial examiners found that 47.4% of deficient advisers had a problem in what Mr. Huggs called “unethical business practices,” a broad category that includes many ministerial items such as contracts that are unsigned or that omit a required clause about refunding prepaid management fees. Excessive fees also fall into this category.
Some 45.2% had various books-and-records violations, 36.4% had supervisory deficiencies, and 27.5% were violating privacy rules.
The most common supervisory problem was a lack of procedures. In the privacy area, advisers often had no policies or failed to give clients the annual privacy notice.
Of hedge funds examined, 93% had registration deficiencies. But hedge funds did better than non-hedge-fund advisers in accurately calculating and recording fees, Mr. Huggs said.
Examiners also found that advisers sometimes stated in materials that they were SEC registered when they weren't and sometimes listed professional designations that had lapsed.
Dan Jamieson can be reached at [email protected].
