When it comes to financial advisors filing information with federal regulators, the question is: How much information is too much?
Large advisors — many of whom have robust information technology systems that allow extraction of data at little incremental cost — seem to think that changes to Form ADV proposed by the Securities and Exchange Commission (SEC) are a good idea.
Regulators use Form ADV data to conduct and implement risk-based examinations of advisors and use the data from the document to help investigations and enforce securities laws. The proposed changes are the latest updates to a document that undergoes revision periodically.
The comment period for soliciting input from the public closed yesterday. SEC regulators said the revisions are aimed at modernizing advisor reporting requirements given the changes in financial services over the past 20 years.
Information about separately managed accounts, the use of social media, advisors with more than one office, multiple private fund advisor entities operating a single advisory business — all of this must be updated to reflect how advisors are structured in the 21st century, according to the SEC.
Big advisors favor the changes proposed by the SEC.
Organizations such as the Vanguard Group, State Street Corp., the Managed Funds Association, Capital Research and Management Company, Oppenheimer Funds, CFA Institute and the Systemic Risk Council said the changes are a long time coming.
The SEC’s proposed reporting initiatives will provide regulators with tools and information “necessary to monitor portfolio composition and risk exposure among funds, without exposing investors to potentially harmful front-running activities,” wrote Mortimer J. Buckley, chief investment officer with Vanguard.
Front-running, or the practice of buying or selling shares of a security for an individual broker or a firm’s account before offering the shares to the public, is illegal, Buckley also said in written comments sent to the SEC.
Smaller advisors, however, are far more circumspect about the proposed changes.
The proposed changes to Form ADV go too far, according to organizations such as the Association for Corporate Growth, and individual consultants including Debra Brown of Brown & Associates in Beverly Farms, Mass., as well as Texas-based attorney Lorna A. Schnase, an independent advocate for registered investment advisors.
More forms, more amendments and filing lengthy documents that few people read isn’t the answer. Schnase said. She added that the “web of rules” surrounding Form ADV has devolved into a burden defeating its own purpose.
Schnase advocated tearing up Form ADV “from its roots.”
And yet, both sides can point to plenty of past examples where rules helped — and did not help — to ferret out corruption and misdeeds.
Regulators said that having more information at their fingertips before the SEC greenlights an advisor looking to do business is the best and most efficient way to protect investors.
The financial crisis of 2008 provides the textbook example for why regulators need to do to a better job of policing financial services intermediaries and distributors before investors bear the brunt of ill-gotten gain.
“Investors will have better quality and greater access to information about their fund investments and investment advisors, and the SEC will have more and better information to monitor risks in the asset management industry,” SEC Chair Mary Jo White said in a news release.
Every year, the SEC charges dozens of brokers and financial advisors for alleged violations of the Investment Advisers Act of 1940, so there’s no shortage of evidence that intermediaries need to be properly supervised.
But at what cost? And to whom?
For sole proprietors and small advisory shops, extracting new data points to satisfy regulators is expensive and time-consuming — the traditional arguments made to push back against regulators who propose new rules.
Advocates for small advisors also point to the limits of a “checklist” approach to individual compliance rules. Besides, they say, advisors who really want to cheat are going to find ways around the rules, no matter how fat the rulebook.
Exhibit A: Former Nasdaq Chairman and registered investment advisor Bernard Madoff, who pleaded guilty to 11 federal felonies and is serving 150 years in prison. Investors lost billions of dollars in Madoff’s Ponzi scheme.
An SEC analysis shows that each advisor, through a compliance officer or manager, will spend an average of three extra hours and cost, on average, $750 to complete questions in connection with the proposed Form ADV changes.
Most of the time would be spent answering questions about separately managed accounts.
Schedule R, which codifies “umbrella registration,” would cost advisors $250 to file, the SEC said. This would be a financial burden that presumably would be incurred by advisors, although nothing stops them from passing that cost along to investors.
There are about 11,600 SEC-registered advisors in the U.S.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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