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RIAs take advantage of lax rules

Susan Axelrod: more brokers are migrating to the RIA landscape where regulatory requirements are relaxed

Susan Axelrod, executive vice president of regulatory operations for Financial Industry Regulatory Authority, Inc. say’s she recognizes some brokers are opting out of the brokerage business and moving toward RIA licensing to avoid the stress and burden of frequent exams.

RIAs take advantage of lax rules

Brokers feeling buried under reporting requirements for examinations and personal activity questionnaires are overwhelmed by costs to maintain a compliance department for regulatory compliance.  As more and more firms find exams time-consuming and stressful, it stands to reason that some would breakaway and join the RIA channel.

A concern is whether investors are at a higher risk because of the lax RIA regulatory landscape.  Given the influx of new entrants  simply to avoid regulatory reporting, there should be cause for concern. Certainly, investors can be well-served in either channel, but the fact is, the SEC examines RIA’s under their jurisdiction on average only once every 10 years. SEC Commissioner Daniel Gallagher recognizes there are more advisers in the RIA landscape violating the law than are being caught. In a speech earlier this year he indicated; “we’re just not finding them quickly.”

So an easy solution would seem to be to increase the number of exams for RIA’s. However, implementing this practice is costly and the SEC has yet to convince Congress to authorize additional funds for management.  As an alternative a self funded third party management idea has been tossed about.  One: allow a third-party to manage the exams of RIA’s; and two: implement fee based exams where RIA’s pay to have the exams done. Again, implementing any new plan could take a few years to develop.

Meanwhile, many feel the America public has waited too long for the government to fix the problem. It’s time to start working on a solution and not just bandying ideas about.

What do you think, should exams for RIA’s be just as frequent as they are for brokers?

 

RIA’s vs Broker-Dealer  what’s the difference?

Fiduciary Responsibility vs. Suitability Rule

RIA’s are subject to Fiduciary Responsibility. They must put client interests above own and declare any conflicts of interest.

Brokers are subject to Suitability Rules.  FINRA’s suitability rule states that firms and their associated persons “must have a reasonable basis to believe” that a transaction or investment strategy involving securities that they recommend is suitable for the customer.

 

Commissions vs Fees

RIA’s are paid an advisory fee directly from the client for advice and service, usually a percent of assets under their care, but sometimes a fixed fee. 

Brokers are paid commission based on investment transactions made on your behalf. 

 

Disclosure Rules

RIA’s provide clients with quarterly reports showing the change in portfolio value and fees charged.

Brokers must follow rules for legal disclosures, by providing prospectus booklets and required documents.

 

Relationship

RIA’s work closely with clients; helping to manage their assets. They typically charge based on a percentage of the assets they manage and maintain transparency in dealings to avoid conflicts of interest.

Broker-dealers facilitate investment transactions. They receive a commission based on investment transactions. They  generally cost less in fees and the relationship is well-suited for savvy investors who research and oversee their own investments.

Read more news about regulatory compliance standards for RIA’s and Brokers. 

The Upcoming SEC and FINRA Cybersecurity Sweeps. Is Your Firm Ready?

Because of all of the sensitive financial information that RIA’s, Broker Dealers and Banks keep regarding their clients, internet security has become a major concern for the wealth management industry. As, hacking techniques are growing more sophisticated, it is hard to tell who could be observing your connection and Internet activity. Due to this cyber-threat the SEC and FINRA will be conducting cybersecurity sweeps of the wealth management industry to make sure you are up to date and taking the latest precautions to protect your clients.

Why Hackers Target RIAs and Financial Firms

Bank account numbers and social security numbers are not the only thing hackers are looking to steal. Many hackers and rogue traders are hijacking trading accounts from financial firms and making unauthorized trades, as well as stealing funds.

How the SEC and FINRA Cybersecurity Sweeps Will Work

The SEC and FINRA are aware of these potential security threats and want the industry to get prepared. They have announced that this year they are planning random sweeps to test the defenses of various firms. If a firm’s cybersecurity is not up to the job, the SEC and FINRA could levy large fines as punishment for the oversight.

The SEC and FINRA will also be checking to see that firms have adequate written policies and measures for cybersecurity, a schedule of periodic tests for weaknesses in the system, and a history of fixing weaknesses in their cybersecurity. If your firm fails in any of these categories, you could be liable for a large fine.

What Your Firm Needs to Do to Prepare

The SEC and FINRA cybersecurity requirements are fairly exhaustive and could catch many firms off guard, especially smaller firms that might not have full-time tech support. If you are worried that you may have a security gap, you could try working with a third party that specializes in this type of compliance. These firms have studied the upcoming requirements and can you give a checklist of the measure you need in place in case of a sweep.

We encourage you to join our free webinar, entitled “Cybersecurity for Financial Services Firms” on July 9th where we will be discussing the procedures you need to get ready. Preparing for the SEC and FINRA cybersecurity sweeps will take some work, but it’s a fraction of the headache of dealing with a serious breach.

Reserve your Webinar seat now at:  https://www1.gotomeeting.com/register/274214880