Currently, HB 1480 has been introduced and referred to the Missouri House Financial Institutions Committee. We will keep you updated on the Bill’s progress.
Earlier this month, The Investment Adviser Rep Syndicate interviewed Ms. Patricia Struck, Chair-Person of the Investment Adviser Section for the North American Securities Administrators Association (NASAA) and the Administrator of the Division of Securities of the Wisconsin Department of Financial Institutions. The interview, relevant to state and SEC registered Investment Adviser Representatives and Registered Investment Advisers is posted below.
The Syndicate: Let’s start with the basics – What is NASAA?
Patricia Struck: The North American Securities Administrators Association is oldest international organization devoted to investor protection. It’s a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.
TS: For how long have you been the administrator of the Wisconsin Division of Securities?
PS: I’ve been the administrator since 1995.
TS: What advisers do the states regulate as opposed to the SEC?
PS: Generally, the states regulate “small” (with assets up to $25 million) and “mid-sized” (with assets up to $100 million) advisers. Of the 28,366 advisers currently on IARD, more than 17,000 are state advisers. The rest of the universe – nearly 11,000 advisers – are SEC advisers.
TS: It is my understanding that NASAA has different “working groups”. Is there a working group focused on the advisory as opposed to the broker industry?
PS: NASAA has “sections” divided into 5 subject matter areas; one of the five is the investment adviser section and another is the broker-dealer section. But while the sections are separate on paper, they work very closely together – especially the investment adviser and broker-dealer section.
TS: For how long have you been the head of NASAA’s Investment Adviser Section?
PS: I just became chair of the section in October of 2013. This is my third term as chair.
TS: Can you give me some examples of some of the positions held by the folks in this section? What exactly does this section seek to accomplish and how does it go about meeting those goals?
PS: The section includes nearly 50 volunteers from across the US and Canada with vast expertise in the whole range of regulatory issues relating to investment advisers. Some are the administrators in their jurisdictions. Some are registration chiefs or lead examiners in their states. Many are examiners who perform exams in advisers’ offices. All have specific subject matter expertise in issues
TS: As you know, the Investment Adviser Rep. Syndicate focuses on the training, compliance, and business goals of the representative rather than the RIA. What observations did you make in 2013 that would be of interest to advisory representatives?
PS: In 2013, as state securities regulators assumed the increased regulatory oversight of investment advisers managing under $100 million in assets, NASAA released an updated series of recommended best practices that investment advisers should consider to minimize the risk of regulatory violations. These recommendations were based on the sample data reported by examiners in 44 state and provincial securities agencies between January and June 2013. The 1,130 reported examinations uncovered 6,482 deficiencies in 20 compliance areas, compared to 3,543 deficiencies in 13 compliance areas identified in a similar 2011 examination of 825 investment advisers.
As regulators, we are concerned about investor confusion stemming from the blurred lines between traditional brokerage, investment advisory, and financial planning services; partially because of the expectations the brokerage industry has set, and partially because of the marketing approach the industry uses – the proverbial ‘financial adviser’ who is your partner in retirement every step of the way. As long as the broker-dealer industry continues to engage in advice driven marketing the confusion will persist. That’s one reason why state securities regulators have long advocated that broker-dealers must be held to the fiduciary duty standard of care currently applicable to investment advisers and be required to place retail investor interests ahead of their own.
TS: What are the section’s goals for 2014?
PS: The section always strives to look for ways to enhance uniformity in investment adviser firm and investment adviser representative registration practices. We also will continue our ongoing efforts to support states in conducting investment adviser exams. And of course, we will review our existing “best practices” for IA firms to consider while developing their own compliance programs and evaluate whether additional practice areas are necessary.
TS: How is the migration of RIA’s pursuant to the Dodd-Frank Act going?
PS: The IA Switch, involving the transfer of more than 2,100 investment advisers from federal to state oversight, was one of the most significant achievements in the history of the North American Securities Administrators Association (NASAA).
The Switch stemmed from Section 410 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which raised the assets under management (AUM) threshold for state regulation of investment advisers from $25 million to $100 million.
This report documents the work that went into the successful completion of the Switch. http://www.nasaa.org/?s=switch+report
TS: If there were three things you would like to see the Syndicate accomplish what would they be?
PS: 1. Helping IARs have a better understanding of the role of their state regulator
2. Helping to create an ongoing dialogue between the IAR and regulatory communities
3. Helping IARs appreciate investor confusion stemming from the blurred lines between traditional brokerage, investment advisory, and financial planning services – and work to cut through that confusion
TS: What is the one thing you would be grateful to see investment adviser representatives take away from this interview?
PS: I would like them to appreciate that we are their partners in putting investors first. State securities regulators are accessible, both to investors and to the people we regulate. We work closely with the IAR communities in our states and appreciate the value and importance of communication. We share the same goal of providing the best level of service to investors. We’re in this together.
Too many small and mid-size investment advisory firms fail to adequately self-audit. There – I said it. Do you agree with me?
There was much debate and wrangling over the SEC to state regulatory transition prompted by the Dodd-Frank Act. The state regulators vowed that they had the capacity to regulate and audit the over 3,000 mid-sized RIA’s that came under their purview with the increase in the SEC AUM threshold. And they have been living up to their vow. As such, small to mid-size independent RIA’s are more likely to be subjected to a routine exam. In just the first six months of 2013, state regulators conducted over 1,000 audits, finding over 6,000 deficiencies. In my experience, the vast majority of these firms fail to retain outside legal counsel for routine guidance, to assist with self-audits, or to step in quickly when the regulators arrive at the front door.
A couple of years back, my law firm represented an investment advisor representative whose small satellite office was subjected to a routine state exam. The regulators found a myriad of problems a self-audit would have discovered. Rather than accepting responsibility for the exam deficiencies, the RIA threw the representative under the bus and blasted him on his U-5. An arbitration panel subsequently awarded our client almost $3.5 million. Regular counsel and self-exams would have been a lot less expensive.
Not long after that case, I served as an expert witness for an investor whose representative steered her towards unregistered securities purportedly backed by real estate in England. The small RIA’s CCO couldn’t even define a security during the hearing. A more robust audit program would have unveiled the representative’s arguably well-intentioned but utterly ignorant advice regarding the investment contracts.
So my admittedly self-serving advice is this: if you are a small or mid-sized RIA, budget for consistent legal advice and self-exams. Saving a buck on compliance isn’t even “penny wise”.
Investment adviser representatives should consider attending the AICPA‘s conference in Las Vegas later this month. “The 2014 Advanced Personal Financial Planning Conference is an intensive, high-level event that will help you prepare for the impact legislative and regulation changes will have on your practice and clients” according to the AICPA’s website. We have already heard back from IAR’s inquiring as to whether their RIA will approve of them joining the Syndicate or attending the upcoming conference. Those inquiries alone exemplify the long-standing need for the Syndicate. But back to the AICPA conference: it has four tracks for focused learning, and a variety of interesting featured speakers. It looks to me like you can “invest in yourself” with this opportunity for as little as $2,500 total. Think about it.