The Dawning Of New Financial Regulations
The regulatory world is changing for financial advisors, and that could have significant implications for current and prospective clients. Many advisors will now have to disclose more about how they operate and they may face new rules or have their businesses reviewed by different regulators. Here are several key changes.
New disclosure requirements. The Securities and Exchange Commission (SEC) has revamped the Form ADV that registered investment advisors (RIAs) must file with the SEC. RIAs now must offer a brochure and supplements written in easy-to-understand “plain English.” Among other requirements, RIAs must also disclose:
- The types of services they offer
- Their total assets under management (AUM)
- How they are compensated
- Any potential conflicts of interest • Risks of investing in securities
- Any material risks that relate to a particular strategy
- Facts about legal or disciplinary problems
Full disclosure will make it easier for clients to evaluate and compare financial advisors and could lead to stronger relationships between clients and their advisors.
Shift in regulatory supervision. Effective July 21, 2011, regulation of more than 4,000 RIAs has shifted from the SEC to state authorities. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), state regulators have authority over RIAs that have AUM of less than $100 million. Prior to the new law, the maximum AUM for state supervision was $25 million.
Their larger responsibility will likely create stiff challenges for states already scrambling to do their jobs at a time when revenues are down and budgets are tight. But under the old rules, many RIAs faced little or no regulatory scrutiny from the SEC, and by dividing the task among 50 states’ regulators, the hope is that routine reviews of RIAs and investigations of possible wrongdoing will become more frequent.
SEC protection. In conjunction with these other changes, the SEC no longer has to comply with requests for information from the public, including those filed under the Freedom of Information Act. It is exempt from disclosing records or information derived from “surveillance, risk assessments, or other regulatory and oversight activities.” Congress and federal agencies can request information, but the public can’t. So, while disclosure to investors has increased on other fronts, in this area some kinds of information will be harder to come by.
Amid these changes, we remain committed to maintaining the highest ethical standards and would be pleased to provide you with information about how we do business.
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