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FPA Supports New Adviser Disclosure Form
Last week, FPA submitted comments to the U.S. Securities and Exchange Commission (SEC) supporting the agency’s overhaul of Part II of Form ADV, the primary disclosure document for investment advisers.
FPA supported the new Form’s transition to a narrative, plain English format designed to make disclosures about the firm’s business, compensation, conflicts and disciplinary history more understandable to investors. The Form also includes a supplement that provides background on the individual who is providing investment advice to clients.
FPA asked the SEC to reconsider the costly requirement of delivering a firm brochure annually, calling instead for a notice specifying any changes and offering to provide the complete, updated document. FPA also expressed concern that state-registered advisers would have to make certain disclosures that SEC-registered advisers would not.
FPA Says No To FINRA or SEC Oversight
Regulators are kicking around the idea of a self-regulatory organization (SRO) for all investment advisors under the auspices of the Financial Industry Regulatory Authority or the Securities and Exchange Commission, but the Financial Planning Association doesn’t want any part of it.
Instead, FPA executives say they prefer creating a state-based professional regulatory organization (PRO) that encompasses only financial planners, not the entire investment advisory industry.
With FINRA reportedly already asking a task force to explore its capacity to become an SRO for advisors, and with SEC staff looking at the issue after it lost a court case last year to the FPA that required it to even the playing field between broker and advisor regulation, sources say the debate over an SRO for the advisory industry isn’t going away any time soon.
“We don’t want an SRO for advisors,” says Duane Thompson, managing director of the FPA’s Washington, D.C., office. “We’ve always taken the position that FINRA is for the regulation of the markets, for brokerage activities and sale of products, and not appropriate for financial planners. Instead of an SRO, we’re interested in exploring a professional regulatory organization [akin to a state medical board] so you’re not just self regulating, but have public representation as well. Our position hasn’t changed. This would be for planners, not for advisors. We’d encourage the SEC to explore the PRO concept in terms of cost and accountability.”
FPA Executive Director Marv Tuttle and President Mark Johannessen say the matter is being put before the group’s 28,200 members in a new survey. “We want to know what members are thinking before we put a stake in the ground,” Tuttle says.
FPA executives say they might push to create a PRO in one state as a trial balloon, with Delaware as a possibility.
Some observers worry that the FPA’s explanations for preferring a PRO over an SRO will leave investment advisors vulnerable to a FINRA-based SRO. “This really is a source of anxiety for me,” says one longtime securities attorney. “In the debate that is developing, the nuances between a PRO and SRO will be lost entirely. There is no interest from the SEC or FINRA—which wants to expand its empire—in a PRO.”
An FPA staffer admitted, “There could be confusion if people don’t realize what we’re saying.” Part of that potential confusion rests with FPA’s desire to limit its proposed PRO to just financial planners, and not investment advisors overall. Sources say that’s unlikely to happen because if the SEC does create a regulatory oversight body, they’ll almost certainly want to cover the entire advisory industry. Most securities attorneys believe that transferring regulatory responsibility from the SEC to FINRA would require an act of Congress.
An industry attorney-lobbyist who asked not to be identified said he has heard from three separate sources that FINRA has a task force in place for developing a strategy to create an SRO for advisors. A spokeswoman from FINRA said no such task force exists.
The attorney-lobbyist also said it was likely that SEC staff would advance the notion of an SRO in May when they deliver their staff response to the Rand Report, which found that investors are confused about advisors and broker regulation. SEC spokesman John Heine said the regulator does not comment on ongoing projects.
Thompson from the FPA says the CFP Board of Standards in the past said it would consider becoming the industry’s SRO. “After many management changes, I don’t know if they have a new position. I don’t think they are off the list if there is a serious effort to look at this,” he says.
Others say that the continuous management turnover and publicized policy blowups at the CFP Board leave it less prepared to handle the task. The CFP Board would not comment.
Special: Member Survey Shows Government Relations Priorities
A recent FPA Member Survey revealed that planners would prefer oversight by the CFP Board of Standards instead of the Financial Industry Regulatory Authority (FINRA), as the debate over a self-regulatory organization (SRO) for investment advisers and financial planners intensifies. However, many of the respondents also said they would need more information. According to the survey, the potential for excessive regulation and the question of whether the regulatory scheme would identify financial planning as a profession tops the list of FPA member concerns with an SRO. Notwithstanding concerns over self-regulation, respondents ranked support of an initiative to license financial planners as a profession as the highest priority for FPA’s 2008 legislative agenda. Opposition to a state sales tax on financial services came in second. Members also overwhelmingly support a new plain-English Form ADV disclosure document for consumers. The survey was sent to 26,530 members, and 1,893 responses were received.
Other News
Senate Finance Committee Focuses on Estate Tax
The Senate Finance Committee held its third in a series of hearings relating to estate taxes on April 3rd. Committee Chairman Max Baucus (D-Mont.) plans to continue working toward a bipartisan estate tax compromise. The committee’s ranking Republican Charles Grassley (R-Iowa), while favoring complete repeal of the estate tax signaled his willingness to compromise saying, "I understand that we must come to a bipartisan solution which will provide certainty and fairness to many individuals who are uneasy with the current situation." Grassley underscored the urgency of the issue noting that with a one-year repeal of the estate tax approaching in 2010 followed by a restoration of the tax to pre-2001 levels, Congress must act now – a sentiment echoed by the committee’s Democrat and Republican members alike. The Senate's budget blueprint includes a provision sponsored by Baucus that would make permanent the 2009 estate tax rate and exemption levels, though that could change as Congress considers other reform legislation.
Fee Disclosure Clears House Committee
In a party-line vote Democrats on the House Education and Labor Committee approved a measure that would require 401(k) service providers and plan administrators to disclose fees to both plan sponsors and to plan participants, broken down into administrative fees, investment management fees, transaction fees and all other fees. The Fair Disclosure for Retirement Security Act, which was introduced by the committee’s chairman, George Miller (D-Calif.), would also require plan administrators to include at least one low-cost index fund in their plan in order to receive liability protection for participants' investment losses.
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