What’s Happening at the SEC

The Securities and Exchange Commission (SEC) appears to have a lot on its agenda.

A couple months into her post as chairman of the SEC, Mary Schapiro and staff have been busy setting out changes, some of which could affect financial advisers.

Deborah Meshulam, chair of law firm DLA Piper’s Securities Enforcement practice and former Assistant Chief Litigation Counsel of the SEC’s Enforcement Division, said financial advisers will likely see increased scrutiny from the SEC. That is an outgrowth of what happened in the last year with fraudster Bernard Madoff and alleged fraudster Robert Allen Stanford, she told PLANADVISER.com (see “Madoff Does Not Pass Go” and “Another Billion Dollar Investment Advisory Fraud Unfolds“).

One area the SEC is concerned with is whether financial advisers perform due diligence before they advise. Meshulam said, “I’m seeing across the board a real focus on the due diligence piece—do [financial advisers] know what they’re recommending? Do they know what they’re putting their clients into?”

Already the SEC has proposed tighter rules for advisers who custody their clients’ assets—a direct response to the Madoff scandal. “There’s little doubt in my mind that these will go through and that it’s just another piece of that heightened scrutiny,” Meshulam said (see “SEC Proposes Tighter Adviser Custody Rules).

For financial advisers, the key is due diligence and documentation—to know the investments you put customers into and to keep a record of everything. “Arguably that’s what they’ve always had to do,” Meshulam said.

Other Items in the News

Fees, such as 12-b1 fees, are another area the SEC will likely address. If the SEC does not address fees immediately, they will come under scrutiny as part of the SEC agenda to re-evaluate the current regulatory scheme, said Meshulam, adding that “they’ve never not been under scrutiny, in my opinion.’

Speaking in Washington recently, SEC Chairman Mary Schapiro said she is “committed to a meaningful and open-minded review of rule 12b-1.” She mentioned that it might not be immediately, but that it is a reform that will receive SEC attention (see “12b-1 Fees, Target-Date Funds to Get SEC Attention). Then two weeks ago, Schapiro said she has asked her staff to prepare a recommendation to change Rule 12b-1 (see “Schapiro Asks Staff to Recommend Changes to 12b-1 Fees“).

Another area ripe for reform is whistleblower complaints. Meshulam explained that previously complaints would flood into the SEC and would not always be handled by someone best-versed in the particular area. She said the SEC wants to have more experts devoted to analyzing these complaints, as well as add better technology to handle them.

Agency Changes

In addition to promoting regulatory changes, the SEC is looking at restructuring its organization. Of course, many regulatory and agency changes go hand in hand.

Meshulam noted that the agency’s priority is to restore some of the credibility that “has taken a hit over these last couple of years.” Part of that has to do with perceptions of not enforcing regulations and “being a bit too cozy with the major Wall Street movers and shakers.”

President Barack Obama is currently deciding on how to restructure the agency (see “SEC Functions Could be Divided under Obama Proposal“). News reports said the Obama Administration is expected to announce those changes in the next few weeks.

Schapiro has outlined her goals for the organization of the SEC, with the broader goal of more transparency and better protection of investors and institutions (see “Schapiro Plans to Increase SEC Enforcement“). Going along with those goals, the SEC recently announced the formation of an Investor Advisory Committee, which will advise the SEC on matters of concern to investors in the securities market (see “SEC Creates Investor Advisory Committee).

Overall, the SEC’s goals revolve around better safeguarding investor funds, Meshulam said, and that means increased regulation of people in the business, including financial advisers.