SEC Advisor Proposal Not Needed, Groups Say

A proposal to ensure that Securities and Exchange Commission-registered financial advisors maintain business continuity and transition plans has come under fire from industry groups as excessive and duplicative.

SEC regulators have proposed a new rule and to amend an existing rule within the Investment Advisers Act of 1940.

Changes, which affect written business continuity and transitions plans to mitigate disruption of an advisory’s practice, would apply to SEC-registered investment advisors, or RIAs.

Advisory practices risk disruptions from floods or the flooding or the loss of data files due to a breach, for example. But practices are also at risk from more permanent changes, such as the death or departure of a key advisor or principal.

Spot checks conducted by SEC investigators over the past few months have found that many advisors are unprepared to handle risks facing their practices, and many of the advisors’ communications with clients have been inconsistent in the wake of a hardship.

SEC regulators want to make sure advisor practices remain resilient. Regulators want to know that foreseeable risks are likely to have little or no impact on the ability of the advisor to continue serving clients and meeting his or her fiduciary obligations.

Approximately 12,000 investment advisors are registered with the SEC and those advisors together manage $67 trillion in assets.

Over the next several years, hundreds of financial advisors and agency principals eying retirement are expected to hand off thousands of client accounts to internal successors or to outside agency buyers.

Mergers and acquisitions involving financial advisors of all types could double by the end of this year over last year to 1,000 or more deals as principals retire or decide they’ve had enough of regulations weighing down on their practices, according to Chip Roame, managing director of Tiburon Strategic Advisors in Tiburon, Calif., in an August.

Keep Rule at Firm Level

The Financial Services Institute, which represents financial services advisory firms and independent financial advisors, said the rule should only apply to RIAs at the firm level. The FSI made the argument in written comments received Sept. 6.

When RIAs are affiliated with broker-dealers and both use common platforms, the rule should provide firms with flexibility to “create and maintain one business continuity and transition plan” for the firms, wrote David T. Bellaire, executive vice president and general counsel of FSI.

Many independent RIAs maintain full-service investing platforms through a home or corporate office. Even if a branch office were to suffer damage, advisors can still execute transactions through the computer system and platforms.

“Put simply, RIAs with such model should not have to manage hundreds or thousands of business continuity and transitions plans, if business can be processed remotely and there would be little to no impact on the customer,” Bellaire wrote.

The majority of FSI member companies are dually registered as broker-dealers and RIAs, he added, and many have business continuity plans that comply with the Financial Industry Regulatory Authority, or FINRA, and other regulatory bodies.

Rule Seen as Expensive

In written comments filed with the SEC over the past two months, the Asset Management Group of the Securities Industry and Financial Markets Association, or SIFMA, said business continuity isn’t a new requirement for advisors.

SIFMA also said that SEC transition planning requirements are unwarranted, adds disparate regulatory requirements, is expensive and that the SEC would be better off resorting to guidance instead of rulemaking.

While supportive of risk mitigation, “we respectfully ask that the SEC re-evaluate key elements of the proposal before any new rule is adopted or guidance is issued,” said Timothy W. Cameron, head of SIFMA’s Asset Management Group.

SIFMA represents broker-dealers, banks and asset managers.

Advisors already devote significant resources to business continuity planning and transition planning requirements by the SEC would be unhelpful, SIFMA said.

Existing advisory regulatory frameworks address the “reasonably foreseeable risks” what might arise when accounts are transitioned from one advisor to another, Cameron said, or when an advisory decides to close the practice.

SEC regulators estimate a one-time cost of implementing the policies at between $30,000 and $1.5 million per SEC-registered adviser, depending on the scope of an advisor’s operations. But economic impact may be “vastly understated,” Bellaire said.

SEC Rule “Useful” Benchmark

The SEC’s proposed rule “balances the protection of clients and investors with the need to avoid imposing an undue burden on advisers,” said Richard Foster, senior vice president and senior counsel for regulatory and legal affairs for the Financial Services Roundtable.

“FSR believes that requiring specific components will ensure that plans are appropriately robust while allowing advisors appropriate latitude to tailor their individual plans,” Foster wrote in a letter to Brent J. Fields at the SEC.

Since advisors differ from bank holding companies, advisors should have more latitude to determine when and how to report a business continuity challenge instead of following mandatory reporting obligations, Foster wrote.

The Roundtable, based in Washington, D.C., is an advocacy organization representing banks, insurers, asset managers, finance and credit card companies.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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