Posts Tagged ‘Securities and Exchange Commission’

All bets are off in the race for financial services AUM in about five weeks, when hedge funds and private equity companies formally gain the right to market directly to potential clients. That’s when the provisions of the JOBS Act that lift the ban on hedge fund and private equity advertising become effective. These rules were formally approved about a month ago by the federal Securities and Exchange Commission.

There’s been a lot of speculation about exactly what hedge funds and private equity companies will do when they can advertise and market, which could be anything and everything including:

  • Celebrity endorsements
  • Billboards
  • National advertising campaigns
  • Direct mail and email solicitation
  • Fancy dinners, conferences and seminars

It’s all likely, but what hasn’t been discussed as much is the impact of the entrance of extremely well funded entities who are set up to compete with financial advisors, financial services companies and asset managers for a limited pool of high net worth, ultra high net worth and institutional assets. There’s a limited pool of these assets, and competition is already fierce among companies that have the right to directly market and advertise today.

Imagine what it’s going to be like in a few years when extremely well funded hedge funds really get their arms around what they can do and hire the brightest and the best Mad Men to formulate and execute a marketing strategy for them. While all healthy financial services firms have money to burn to a degree, hedge funds charge fees far in excess of what other asset managers can charge and they also have the ability to lock up AUM so that it can’t flow out in the same way that it does with mutual funds and financial advisors.

If you are currently seeking to gather AUM, you better watch out. These guys are coming and they have the ability to suck all the air out of the room so that there is even less space for other messages. In an already noisy atmosphere, it will be even harder for potential clients to distinguish your message from all the others out there.

That means if you don’t have a clearly defined ideal client type and a plan to attract those clients to you, you better get moving. Time’s a wasting…..

As an accountant — well, actually, someone with an accounting background — I have a keen interest in corporate accounting and the integrity of corporate financial statements. Unfortunately, sometimes those two things don’t comfortably co-exist (integrity and corporate financial statements).

While Generally Accepted Accounting Principles (GAAP), the set of standards that guides the presentation of corporate financial statements and supporting documents, may seem like a monolithic set of rules that are carved in stone with little or no room for interpretation, the bodies of financial statements that have been manipulated in the name of GAAP are piled high in a back room somewhere. There’s nothing like the pressure of analysts expectations for earnings or a large bonus on the line to get C-Suite executives to pressuring the CFO to fudge data just a bit…or a lot.

And when the watchdog is otherwise occupied, it would seem that the temptation would be even greater to bend or break the rules because there is that much less chance of being caught, when the odds were never that great in the first place.

So I was happy to see (it’s funny what can make me happy, but what can I tell you) that the new chair of the SEC, Mary Jo White, and her co-enforcement chiefs have decided to make accounting fraud a top priority of the SEC, according to the Wall Street Journal. Due to distractions from the financial crisis and budget cuts (my surmise), accounting fraud related enforcement actions have dropped by more than half from what they were in 2003 to 2005.

As corporations become more sophisticated and financial instruments more opaque, it is more necessary than ever before that the SEC stay vigilant and do its best to combat corporate accounting fraud. This is especially true given the fact that auditors have been shown again and again to side with management and allow egregious accounting practices to go unchallenged. Either that, or many are genuinely asleep at the wheel with what’s happened over the past few years.

Without the assurance that financial statements genuinely reflect the financial activity and results of corporations, shareholders are operating in the dark. And we deserve better than that.

Charles Schwab has given up – at least for the moment – on forcing its customers to waive their right to a class action lawsuit in case of a dispute. While it’s hand was forced by the Financial Industry Regulatory Authority (FINRA), Schwab could have retained the class action ban in its securities agreements until its dispute with FINRA is fully resolved.

As reported by The Wall Street Journal, FINRA brought a compliant against Schwab early last year, alleging that the the class action ban was against FINRA rules. FINRA rules prohibit the use of class action waivers by brokerages and investment banking firms and requires firms to only require arbitration of individual claims.

In February, part of the FINRA complaint against Schwab was dismissed as the FINRA panel hearing the dispute said that it couldn’t stop Schwab from forcing its customers to waive those rights. FINRA has appealed that decision.

Then came the Schwab decision to modify its customer agreements to remove the class-action ban beginning May 15 and “in the foreseeable future.” Of course, if they ultimately win they are likely to reinstate the class action ban — a company spokesperson said, “We have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decision.”

Regardless of the outcome of this dispute, it’s clear that the binding arbitration system in securities dispute needs to be throughly examined and eventually discarded by the federal Securities and Exchange Commission (SEC).

FINRA is the administrator and a major stakeholder in the current binding arbitration system, which requires customers of brokerage and investment banking firms to arbitrate disputes rather than take them to court. I’ve written about binding arbitration, which is biased against consumers, unfair and serves to abrogate the right of investors to access the U.S. justice system in a post entitled SEC should end mandatory arbitration clauses in brokerage contracts.

According to the consumer rights group Public Citizen, more than 7 million Schwab customers have been affected by the class action ban. In a letter urging new SEC Chairwoman Mary Jo White to take up the subject of either banning or modifying the use of arbitration in brokerage contracts, Public Citizen and 14 other organizations, including AARP, Consumer’s Union and the Consumer Federation of America, notes that “The 2008 financial crisis, the effects of which the country continues to wrestle with five years later, should be enough to motivate the Commission to restore investors’ legal rights.

“Brokerage firms were responsible for many fraudulent actions that led to or arose from the financial crisis. Indeed, the Commission identified Schwab as one of the firms that misled investors and ‘concealed the extent of risky mortgage-related and other investments in mutual funds and other financial products.’ Ensuring that investors can choose the forum in which to resolve disputes with broker-dealers and investment advisors is critical to both to remedying those past abuses and deterring future misconduct.”


When the federal Securities and Exchange Commission gave permission for corporations to disclose market-moving material on social media platforms, it finally fully legitimized a mode of communication that’s become routine for millions of business and casual users. So if you’re a financial advisor who isn’t using social media or who is just dabbling, realize that when the SEC arrives at a party and you’re not there yet, the party may be nearly over.

Ok, maybe I’m exaggerating…a bit. My point is that when glacially-slow moving federal regulators are moved to bless a method of communications, it means that pretty much everyone else is already there.

All too many financial advisors have freely used the fig leaf of compliance (read the SEC and FINRA) to explain their absence from social media. And really, there hasn’t been much excuse in the past few years as FINRA and the SEC have issued more guidance about social media. Now there is none. 

There are a lot of reasons why financial advisors need to be on social media, I won’t go into all of them today. What I will offer is that there is an opportunity cost to NOT being there. Today’s savvy high net worth individual — very likely your potential client — isn’t going to meekly show up in your office in response to a referral from a friend and turn over all their assets to you. 

No, that individual — in possession of a referral to you — will seek to do some due diligence before contacting you. That due diligence will likely include a simple Google search, which is usually informative and revealing. If that Google search shows links to an attractive, focused website, presence on major social media platforms and thought leadership on topics of interest to that individual, a phone call or an e-mail to you may very well follow, which could lead to a client relationship.

If instead it leads to an outdated, clunky website, no social media or sketchy social media (an abandoned egg profile on Twitter, perhaps) and outdated links, that call or e-mail may not come.

Look, I’m not saying social media is the sole reason that clients will sign on with you. I’m saying that by not engaging with potential clients in the arenas where they are gathering information and poised to gather more (re the SEC’s announcement), you’re leaving yourself vulnerable to the competition and giving potential clients an excuse NOT to engage with you.

In this day and age of increasing competition in the financial advisory space and commoditization of financial advisory services, it behooves you not to give them one. 

Washington, DC has long been known for the revolving door that catapults former regulators into high-powered lobbying positions. The Wall Street Journal reported Tuesday that Mary Schapiro, the former chief of the federal Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) was hired as a managing partner by Promontory Financial Group LLC.

Promontory has become known as the “shadow” financial regulator because it’s executive ranks are loaded with former high-level regulators who peddle their insider knowledge and connections to their clients, according to illuminating articles in American Banker and Business Insider. Their knowledge is so deep that they can give clients the inside track on the direction of future regulation and how clients can manage regulatory risk in a more proactive and less reactive fashion.

For firms that can afford their fees, such knowledge is nearly priceless. Financial firms, especially, have been on the hot seat ever since the financial crisis in terms of potential regulation, even though a lot of that heat hasn’t translated into tough regulations and prosecutions.

Promontory’s executive ranks are so loaded with smart, former high ranking government officials that they are actually called on by congressional committees and federal financial agencies to advise on financial and regulatory matters. So what, you say? This happens all the time.

It does, and it doesn’t. Apparently few lobbying firms possess the specialized niche, knowledge, experience and connections that Promontory does. This elevates lobbying and influence-peddling to an unprecedented level. Promontory doesn’t appreciate being referred to as a lobbying firm; it’s CEO told American Banker that the firm endeavors to influence it’s clients to do what the government wants them to do.

It’s amazing how even the smartest, most savvy individuals can convince themselves that what they are doing is right and in the public interest.

My belief is that you can’t have it both ways and that the public interest is in no way, shape or form being served by the proliferation of lobbying firms, especially those that operate at such a high level. Regardless of their motives and intentions, the fact is that wealthy individuals and corporations have the ability to purchase access and influence at an outsize level.

That disenfranchises the vast majority of us who can only vote, make a phone call and write a letter in the hope of getting the ear of our elected representatives. It’s not right that the size of your lobbying budget determines what access and influence you have on our elected representatives.

Ultimately, that means that too much of regulation and legislation is in play for those with the resources, while the rest of us look in from the outside. If you’re wondering why not much has changed since the financial crisis in terms of the government reigning in the too big to fail firms that precipitated it, this is one of the reasons.

And it’s a reason why we’re likely to see the same thing — another global financial crisis — happen again…

When the SEC issues it’s yearly National Examination Guidelines detailing what its examiners will look for in audits of the more than 11,000 federally registered investment advisors and 800 investment companies, prudent advisors pay attention. While it’s unlikely that you’ll get examined if you fall into this category given the SEC’s limited resources, the guidelines are very informative in terms fo what issues regulators are paying attention to in any given year and how perceptions of risk are evolving in the financial advisory space.

As reported by Financial Planning magazine this morning, risk around conflict of interest is an ongoing priority for the Commission because conflicts of interest tend to arise constantly and change in nature. Examiners will be looking for specific conflicts of interest, what advisors are doing to mitigate and disclose those those conflicts, which can be particularly challenging for larger advisory firms. During examinations, staff will be analyzing financial and other records to identify compensation arrangements that aren’t being disclosed to clients, which may include:

  • Undisclosed fee or solicitation arrangements
  • Referral arrangements with affiliated entities
  • Receipt of payment for services allegedly provided to third parties

In terms of marketing, the SEC is looking at how advisors market, specifically around performance numbers. The SEC wants to ensure that all advertising of performance numbers is accurate, including that of hypothetical and back-tested performance and will look at assumptions and methodology, disclosures and compliance with record-keeping requirements.

The SEC’s other priorities in examinations include fraud detection and prevention, technology and corporate governance and enterprise risk management.

The take away for alert advisors? Analyze your practices and processes in these areas to make sure you meet or exceed the SEC’s standards. Talk to your team about potential conflicts of interest and make sure anything that even remotely might look like a conflict is disclosed to clients, whether it would draw a second look in an examination or not.

Whether you are likely to be audited or not, adopting best practices and evolving your practice to meet the highest standards possible is the best route to gain trust with your clients, potential clients, referral sources, employees and other stakeholders.