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The SEC: Brokers and Advisers Should Expect Consolidated Oversight and Unannounced Audits

Written by David Welch, Esq.

Last week, before the Senate Banking Committee, SEC Chairman Mary Schapiro made it clear that she intends to consolidate oversight of financial services firms and subject them to stricter regulatory controls. Currently, FINRA and the SEC share supervision of broker-dealers and investment advisers. Investment advisers are required to abide by a “fiduciary duty” standard and brokers are held to a standard of “suitability.” Arguments regarding which standard is more stringent aside, Schapiro views the inconsistency as an encumbrance on regulatory oversight and implied that a uniform standard is on the horizon.

Schapiro and FINRA CEO, Richard Ketchum, explained that enforcement of the uniform standard will be consolidated under the purview of FINRA, for brokers and advisers alike. In his testimony before the banking committee, Ketchum stated:

“Finra is uniquely positioned from a regulatory standpoint to build an oversight program for investment advisers quickly and efficiently. Quite simply, as we learned from Madoff, it does not make sense for two separate, independent regulatory bodies to oversee investment advisers and broker-dealers, especially when these businesses may exist in the same legal entity."

In addition to consolidated oversight and a uniform standard, Schapiro and Ketchum focused on what they consider to be insufficient examination of investment advisers. The SEC’s proposed regulation is expected to require periodic unannounced compliance audits by a third party for all advisers with custody of client assets. Ketchum pointed out that under the current system, a decade could pass without an investment adviser firm undergoing an examination. Also, senior officers of both broker-dealer and investment adviser businesses will have to periodically attest to the sufficiency of the compliance controls they have in place.

To be sure, the proposals discussed above are not the only changes we will see in the coming months. Other hot-button issues that will be addressed in the near future include a modification of the defunct uptick rule, a limitation on naked short selling, and increased regulation of hedge funds.

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This page contains a single entry from the blog posted on March 31, 2009 9:35 AM.

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