As questions arise about the SEC’s ability to fulfill its mandate, and a growing chorus of commentators, legislators and professionals calls for appointment of a self-regulatory organization to oversee registered investment advisors, Financial Services Committee Chairman Spencer Baucus is proposing a less radical solution to the agency’s problems.

Chairman Baucus is drafting legislation—the SEC Modernization Act—that would reorganize the Securities and Exchange Commission (SEC), and bring “comprehensive reform” to the agency. “The SEC is structurally flawed and suffers from operational inefficiencies and organizational incoherence,” according to Chairman Bachus. “This legislation will be a comprehensive restructuring of the SEC. It will make the SEC more efficient, consolidate duplicative offices, enable the agency to use better technology, and strengthen ethical safeguards to avoid conflicts of interest.”

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the SEC and its regulatory activities in Advisor’s Journal, see Better Late Than Never: SEC Implements the Switch (CC 11-129), Disarray at the SEC Is Complicating the “Switch” (CC 11-83), & Hedge Funds Must Now Register with the SEC under the New Wall Street Reform Act (CC 10-45).

The U.S. Chamber of Commerce is warning that self-regulatory organizations (SROs) like the Financial Industry Regulatory Authority (FINRA) are rapidly morphing into regulatory bodies without the self-governance component that was supposed to be their hallmark.

FINRA’S shift from SRO to quasi-governmental agency has not brought with it the transparency we expect from government agencies. The Chamber’s Center for Capital Markets 2011 summer paper, The Unfinished Agenda, notes that, although FINRA has tremendous regulatory influence in the capital markets, its power is not tempered by the “checks and balances” applicable to government agencies.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA and its regulatory activities in Advisor’s Journal, see FINRA Sets Regulatory Sights on Structured Products (CC 11-130), FINRA Rule 45-30: Expansive New Complaint Report Requirements (CC 11-96), & FINRA Changes the Rules on How Low-Price Equities Are Traded (CC 11-99).

The idea of appointing a self-regulatory organization (SRO) to oversee registered investment advisors (RIAs) has been knocking around in Washington for almost a decade. But the push to delegate some of the SEC’s authority over RIAs to an SRO has new urgency as the SEC struggles under budget cuts and its increased responsibilities under the Dodd-Frank Wall Street Reform Act.

The situation at the SEC is so dire that some of the most strident opponents of an SRO for advisors are backpedalling, recognizing that the Securities and Exchange Commission (SEC) may be unable to fulfill its mandate without outside assistance. Even the Consumer Federation of America (CFA), a consumer organization that has long advocated against establishment of an advisor SRO, is coming around.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the proposal to appoint an SRO for advisors in Advisor’s Journal, see FINRA Plans New Power Grab as SEC Falters (CC 11-67) & Republicans Balk at RIA User Fees (CC 11-60).

How fast time flies. The one year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) came and went on July 21^st, and we’re left wondering: Where are we now?

Surprisingly little has changed since the Act was passed on July 21, 2010. The Securities and Exchange Commission (SEC) and other federal agencies charged with implementing Dodd-Frank have struggled to comply with their mandate. The SEC, in particular, has had difficulty meeting its timeline due to funding problems and short staffing.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Dodd-Frank in Advisor’s Journal, see Dodd-Frank: Dying on the Vine? (CC 11-116), Is Barney Frank’s Resolve to Implement Dodd-Frank Weakening? (CC 11-95), & Republicans Look to Erode Dodd-Frank (CC 11-75).

Why is This Topic Important to Wealth Managers? This blogticle discusses the municipal bond market. The discussion focuses on regulation regarding wealth managers who recommend the use of muni bonds to clients.

This past week served as the one year anniversary of when President Obama signed into law the Dodd-Frank Act. [1]

The Dodd-Frank Act was enacted, among other things, to promote the financial stability of the United States by improving accountability and transparency in the financial system.[2]

With Section 975 of Title IX of the Dodd-Frank Act, Congress amended Section 15B of the Exchange Act [3] to, among other things, make it unlawful for municipal advisors to provide certain advice to, or solicit, municipal entities or certain other persons without registering with the Commission.[4]

Since then the SEC has taken several actions regarding municipal securities. In December, it voted to propose a rule creating a new process by which municipal advisors must register with the SEC. [5] In May 2010, the Commission voted to approve rule changes improving the quality and timeliness of municipal securities disclosure. [6]

Both measures were intended to strengthen existing requirements for the scope of securities covered, the nature of the events that issuers must disclose, and the time period in which disclosure must be made.

Until the passage of the Dodd-Frank Act, the activities of municipal advisors were largely unregulated and municipal advisors were generally not required to register with the Commission or any other federal, state or self-regulatory entity with respect to their municipal advisory activities.

Some entities that are now subject to registration as municipal advisors pursuant to Section 15B of the Exchange Act, and rules or regulations promulgated thereunder, currently are subject to regulation by various federal and state regulators in other capacities.  These entities include brokers, dealers, municipal securities dealers, investment advisers, and banks.  Such regulations, however, generally do not apply to their activities as municipal advisors.

Municipal advisors engage in municipal advisory activities in a variety of contexts.  For example, municipal advisors participate in the majority of issuances of municipal securities.

According to the Municipal Securities Rulemaking Board (“MSRB” or “Board”), approximately $315 billion (70%) [7] of the municipal debt issued in 2008 was issued with the participation of municipal advisors commonly referred to as “financial advisors.”

A study that looked at historical involvement by “financial advisors” identified participation rates of approximately 50% in a nearly twenty-year period ending in 2002. [8]

The municipal securities market consists of over 51,000 issuers,[9] a diverse group that includes states, their political subdivisions such as cities, towns and counties, and their instrumentalities such as school districts or port authorities.  These public bodies are governed by state and local laws, including state constitutions, statutes, city charters, and municipal codes.

Municipal securities are issued by government entities to pay for a variety of public projects, for cash flow and other governmental needs, and to fund non-governmental private projects by acting as a conduit on behalf of private organizations that wish to obtain tax-exempt interest rates.

As of March 31, 2010, municipal issuers had an outstanding principal amount of securities in excess of $2.8 trillion. [10]

Tomorrow’s blogticle will continue discussion on regulation.

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[1] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[2] See Pub. L. No. 111-203 Preamble.

[3] 15 U.S.C. 78o-4.  All references in this Release to the Exchange Act refer to the Exchange Act as amended by the Dodd-Frank Act.

[4] See Section 975(a)(1)(B) of the Dodd-Frank Act; 15 U.S.C. 78o-4(a)(1)(B)

[5] See 17 CFR Parts 240 and 249.

[6] See 17 CFR Parts 240 and 241.

[7] See Municipal Securities Rulemaking Board, “Unregulated Municipal Market Participants:

A Case for Reform” (Apr. 2009), available at http://www.msrb.org/News-and-Events/PressReleases/Press-Releases/~/media/Files/SpecialPublications/MSRBReportonUnregulatedMarketParticipants_April09.ashx (“MSRB

Study”).

[8] See Arthur Allen and Donna Dudney, May 2010, Does the Quality of Financial Advice

Affect Prices?  The Financial Review 45: 389 (“Allen and Dudney”) (analyzing data from

1984 to 2002).

[9] See Report on Transactions in Municipal Securities, Office of Economic Analysis and

Office of Municipal Securities, the Division of Trading and Markets, U.S. Securities and

Exchange Commission, (July 1, 2004).

[10] See Federal Reserve Board, Flow of Funds Accounts, Flows and Outstandings, First Quarter

Authors: George Mentz and Benjamin Terner

The Securities and Exchange Commission (SEC) recently adopted rules that require advisers to hedge funds and other private funds to register with the SEC. The new rules also establish exemptions from SEC registration and reporting requirements for certain advisers, and reallocate regulatory responsibility.

The rules adopted by the SEC implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding investment advisers, including those that advise hedge funds.

The rules provide for a transitional exemption period so that private advisers, including hedge fund and private equity fund advisers, who are required to register should do so by March 30, 2012. However, certain rules regarding exemptions for venture capital fund and certain private fund advisers are effective July 21, 2011.

The rules come on the heels of the financial crisis as legislation to protect consumers was a Congressional prerogative. That’s because generally a significant number of individuals and institutions invest a substantial amount of assets in private funds, such as hedge funds and private equity funds.

However, until the passage of the Dodd-Frank Act, advisers managing those assets were subject to, what some consider, not enough regulatory oversight.

With the Dodd-Frank Act, Congress attempts to close the “regulatory gap” by generally extending the registration requirements under the Investment Advisers Act to the advisers of these funds. The new law also provided the SEC with the ability to require the limited number of advisers to private funds that will not have to register to file reports about their business activities.

It has been the case that for many years advisers to private funds were not required to register with the SEC because of an exemption that applies to advisers with fewer than 15 clients – an exemption that counted each fund as a client, as opposed to each investor in a fund. As a result, some advisers to hedge funds and other private funds have remained outside of the SEC’s regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors.

Nevertheless, Title IV of the Dodd-Frank Act eliminated this private adviser exemption. Consequently, many previously unregistered advisers, particularly those to hedge funds and private equity funds, will have to register with the SEC and be subject to its regulatory oversight, rules and examination. This process will come at a great expense to those now under SEC control.

This can be attributed to the fact that these advisers will now be subject to the same registration requirements, regulatory oversight, and other requirements that apply to other SEC-registered investment advisers.

The SEC is also requiring additional information from investment advisers that are required to register with the Commission. Generally these individuals provide information in their registration form that is not only used for registration purposes, but that is used by the SEC in a variety of ways “to support its mission to protect investors.”

To “enhance its ability to oversee investment advisers to private funds”, the SEC is beginning to require advisers to provide additional information about the private funds they manage. The information obtained as a result of these amendments is designed to help the SEC in fulfilling its increased responsibility for private fund advisers arising from the Dodd-Frank Act.

In conclusion, all persons are subject to federal laws and the laws of the SEC. As an example, insider trading (10 B-5) applies to all of us.  The question is whether this is duplication of regulation?  As you know, FINRA regulates their licensed advisors while the SEC also can regulate these advisors.  Also, 3^rd party custodians and administrators are generally regulated by the SEC.  An example of a 3^rd Party would be Schwab or Fidelity which both provide “Institutional & Administrative” services for a fee to hedge funds, money managers and independent RIAs.  While protecting the consumer is a great idea, having 3-4 layers of regulation over the same accounts and securities becomes somewhat cumbersome. On top of that, many states have these same advisors under their supervision and regulation.

While this all sounds confusing, this is just for securities.  When the customer or advisor deals with banking and insurance, these are supervised by other agencies at  both the state and federal levels.

While the concept of Dodd-Frank may be a good idea from a consumer protection point of view, we have to wonder if there will be too many regulators and too little producers.  In sum, this could be the best time in history to start a career in financial compliance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

As expected, the SEC has delayed implementation of the RIA “switch.” On June 22, the SEC approved rules that will transition thousands of advisors from SEC to state regulation, but the new rules won’t be effective until June 28, 2012, almost a year later than initially expected.

Under the regulatory structure in place prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisors with $25 million or more in assets under management (AUM) were regulated by the SEC, and those with less than $25 million in AUM were regulated by the states. Dodd-Frank changed the registration threshold so that advisors with between $25 and $100 million in AUM—so-called “midsize advisors”—will be required to withdraw their registration from the SEC and register with state regulators.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the planned switch and in Advisor’s Journal, see Disarray at the SEC is Complicating the “Switch” (CC 11-83), Hedge Funds Must Now Register with the SEC under the New Wall Street Reform Act (CC 10-45) & Dodd-Frank Wall Street Reform and Consumer Protection Act (CC 10-35).