Compliance January 12, 2011

SEC Reports on B/Ds and Advisers Expected Soon

The Securities and Exchange Commission (SEC) is expected to publish its reports on whether broker/dealers should be held to a fiduciary standard and whether advisers need a self-regulatory organization.
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The Dodd-Frank financial reform law mandated that the SEC investigate these matters.  The first report regarding adviser oversight may come out as early as this Friday, according to Reuters.  Currently, registered investment advisers (RIAs) are regulated by the SEC only, whereas broker/dealers are regulated by the SEC and the Financial Industry Regulatory Authority (FINRA).  Proponents of a self-regulatory group for advisers say that the SEC is stretched too thin to conduct thorough oversight responsibilities.  Advisers, however, oppose a self-regulatory group, saying they prefer the government to step up its oversight of the industry instead of outsourcing it to a private group, reports Reuters. (The SEC has been working on beefing up its oversight of advisers, see “SEC Proposes New Rules for Advisers.”)

As for the debate about whether broker/dealers should be held to a fiduciary standard, rather than current suitability standard (which requires an investment be “suitable” for a client, not necessarily in the clients’ best interest), gets to the bottom of SEC Chairman Mary Schapiro’s repeated concern that “mom-and-pop investors” usually do not know the difference if someone is giving unbiased advice or is trying to sell a lucrative product.  

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One alternative to making broker/dealers work under a fiduciary standard is to require a written disclosure of fees. “What we are hoping as a result of this SEC process is they come up with a practice that allows firms to make the disclosure of the conflict, get a client waiver if the client so desires and then you have a way forward,” said Ira Hammerman, the general counsel at the Securities and Financial Markets Association (SIFMA), according to the report.  Those who oppose the disclosure idea say there are too many loopholes for broker/dealers to hide conflicts of interest.   

Reuters reports that many observers expect the SEC to come up with a new definition of fiduciary duty that finds a balance for broker/dealers and traditional investment advisers.   

Compliance January 12, 2011

Schwab: Look at Banks, Rating Agencies in Mortgage Mess

Charles Schwab has urged regulators to focus on other parties in the nation’s recent mortgage meltdown after the firm was dealt a fine from the SEC.
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The Schwab comments came in a prepared statement released after the company’s settlements with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) were made public on Tuesday (see “Schwab Hit with $136M in Fines“). Regulators charged Schwab did not accurately represent the fund’s risk level in its marketing; certain Schwab representatives said the fund was low risk although it had taken on significantly risky investments including volatile mortgage backed securities.

“To provide future protection for individual investors from similar market crises, the company hopes that greater focus and attention will ultimately be given to the investment banks that created mortgage-backed securities and the ratings agencies that legitimized them with triple-A ratings, which have so far largely escaped scrutiny and accountability,” Schwab contended in the statement, which denied all wrongdoing.

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Losses suffered by YieldPlus shareholders were prompted by market conditions, not something for which Schwab should be blamed, the company said.

“Schwab would never seek to profit at the expense of its clients. We regret that fund shareholders lost money in YieldPlus. Indeed, Charles R. Schwab, the company’s founder and chairman, was one of the largest investors in the fund,” Schwab wrote. “The decline in the YieldPlus fund was the result of an unprecedented and unforeseeable credit crisis and market collapse. Until the credit crisis, the YieldPlus Fund was consistently one of the top performing funds in its category for eight years and held a Morningstar 5-star rating from December 2004 through September 2007.”

Schwab said in the statement that it would take an after-tax charge of $97 million in its fourth quarter financial results relating to the settlements.

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