How clearing and custody firms are taking new regs head-on

From lobbying to help on tax-accounting rules, they are going beyond traditional roles

Jul 17, 2011 @ 12:01 am

By Dan Jamieson

With the flood of new regulations facing investment advisers, clearing and custody firms are taking on a larger supporting role for their clients, doing everything from lobbying in Washington to the nitty-gritty task of preparing for new cost basis rules.

At the top of the lobbying list are fiduciary standards being created by both the Securities and Exchange Commission and the Labor Department, and the role a self-regulatory organization might play in overseeing advisers.

“We're very focused on the SRO issue,” said Nick Georgis, vice president of advisor services at Charles Schwab & Co. Inc. Advisers are worried about the costs of an SRO and losing the principles-based regulations of the SEC that they contend have worked well for decades, according to Mr. Georgis. He was recently in Washington with representatives of the Investment Adviser Association and Schwab advisers, meeting with members of Congress on the SRO issue.

TD Ameritrade Institutional has been urging its advisers to tell their elected representatives to keep adviser oversight with the SEC — and implement user fees to pay for exams.

Custody firms also have aligned with advisers in backing a fiduciary duty for retail brokers that would require them to act in the “best interests” of clients rather than simply putting them in “suitable” investments.

“Where there is an ongoing advice relationship, customers deserve a fiduciary standard of care,” said Skip Schweiss, managing director of advocacy and industry affairs for TD Ameritrade Institutional.

But both TD Ameritrade and Schwab walk a fine line in advocating for a fiduciary standard, while also wanting a carve-out for their discount-brokerage activity.

“If you have to do oversight on an ongoing basis for a very small [transactional] account, it becomes incredibly expensive for the account holder,” Mr. Georgis said.


Meanwhile, the Labor Department's revision of its own fiduciary rule covering advisers to retirement plans is perhaps the biggest concern among some clearing and custody firms.

Opponents hold that the proposed rule, which would change the definition of who is a fiduciary to a retirement plan, would put unintended restrictions on service providers to plans and create too many differing standards of care.

At a conference for Pershing LLC's broker-dealer and registered investment adviser clients last month, chairman Richard Brueckner warned that the DOL is “being pretty intransigent,” despite an industry effort that produced 10,000 letters to Congress objecting to the proposal.

“We want to make everybody aware there's broader implications around the whole [DOL] fiduciary issue [and want the DOL] to spend more time on the interpretations,” Kevin Taylor, chief compliance officer at Pershing Advisor Solutions LLC, said in an interview.

Raymond James also has urged its clients to get the DOL's fiduciary proposal rescinded, said Michael Di- Girolamo, head of Raymond James Financial Services Inc.'s investment adviser division.

TD Ameritrade supports the DOL's effort in concept, although the firm has concerns about the potential impact on individual retirement accounts.

The DOL likely will have a final rule approved by the end of the year. The SEC is still working on its fiduciary proposal, which is expected to be out for comment this year.

Beyond working on the policy issues of the day, the big clearing and custody firms are busy helping clients get up to speed on a number of newly effective regulations.

For example, the new cost-basis-reporting rules begun this year are being overlooked by many advisers, observers said, and could surprise investors next year at tax time.

“Tax reporting for 2011 will be a confusing mishmash,” said Theresa Bain, executive vice president of product integration at Trust Co. of America.

Some information will stay the same, but other data will be reported under the new rules, including disallowed losses from wash sales, she said.

Clearing firms and custodians have been issuing white papers and holding webcasts on cost basis changes for broker-dealers and RIAs in anticipation of investor questions.

What's more, advisers should be reconciling their own cost basis information with their custodians' data, said Brian Keil, director of cost basis and tax reporting for Schwab, as well as making sure they understand how all their custodians will be reporting the data.

Broker-dealers and clearing firms will have to prepare for revised suitability rules from the Financial Industry Regulatory Authority Inc., due to go into effect in July 2012. The changes will add five suitability elements that will have to be tracked.

Broker-dealers also will have to comply with a number of new trade-reporting requirements this year.


RIA firms, meanwhile, are dealing with a renewed focus by regulators on custody issues and exams.

New custody rules from last year, and a desire to increase the frequency of adviser exams, may be causing regulators to get more aggressive, observers said.

“The SEC is in our advisers' offices a lot more than they used to be — and state examiners, as well,” said Greg Jones, chief compliance officer at Trust Co. of America.

Calls from examiners to verify assets and confirm that statements have been sent also have increased, he said.

Another option for a compliance-challenged firm is merging or joining with another practice that has a compliance infrastructure in place. Observers said that advisers and small B-Ds both seem to be seeking out merger partners to generate future growth and achieve scale.

Clearing and custody firms help clients make introductions to possible merger partners. It used to be mostly small breakaway advisers who wanted to join existing firms, Mr. DiGirolamo said. “But now we see $50 million[-plus] advisers who don't want to set up their own firms,” he said, in part to lessen the regulatory burden.

E-mail Dan Jamieson at


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