MODULE 9 FIDUCIARY, ETHICAL AND REGULATORY ISSUES FOR ADVISORS Flashcards
SECURITIES ACT OF 1933
*applies to most new public issue securities
(1) requires registration of sec’s with the SEC by providing full disclosure in reg stm for the issuer/vendor’s issue.
(2) if SEC finds misleading / incomplete / inaccurate info, offering is delayed until corrected.
(3) all issues must come w/ a prospectus
SECURITIES EXCHANGE ACT OF 1934
*established the Securities and Exchange Commission (SEC)
(1) gave SEC enforcement powers
(2) aimed to regulate securities transactions on both exchanges and OTC markets
(3) forbids market manipulation, deception, misrepresentation of facts, and fraud
(3) requires most BDs, transfer agents, clearing agencies, and SROs (including exchanges) to register w/ the SEC
(4) requires issuers to provide ongoing quarterly financial stms with the SEC, annual shareholder reports, and 10-K reports w/ the SEC annually
(5) made subject to law the trading activities of corp directors and officers
(6) SEC interprets “insider” no longer as directors and officers, but anyone who has NPI
(7) gave the Federal Reserve Board of Governors responsibility for setting margin requirements when buying securities
INVESTMENT ADVISERS ACT OF 1940
(1) wrote into law the fiduciary duty owed by IAs to their clients
(2) requires IAs to register w/ the SEC and file Form ADV
(3) contains certain prohibitions regarding advertising practices & requirements for disclosure
(4) IAs with over $100M AUM register w/ the SEC, and all other IAs register @ the state level
INVESTMENT COMPANY ACT OF 1940
(1) structure and operations of mutual funds subjected to DETAILED regulation
(2) mutual funds belong to class of investment companies defined in this act as DIVERSIFIED or NON-DIVERSIFIED
(3) requires mutual funds to: maintain detailed books/records on owned securities, use custodian to safeguard the securities, & send semiannual/annual reports to both SEC and shareholders
(4) requires proceeds from redeemed shares be sent to S/H within 7 days of redemption
SECURITIES INVESTOR PROTECTION ACT OF 1970
- established the Securities Investor Protection Corporation (SIPC)
- SIPC was set up in response to problems in late 1960s when high volume caused back-office paper crunch -> bankruptcies, investor losses
- SIPC insures brokerage accounts but does NOT cover market losses suffered while waiting to get securities from a bankrupt brokerage firm
- does NOT cover losses due to investment fraud
- SIPC is NOT the securities equivalent of FDIC
- cost of insurance is paid for by members of SIPC
purposes:
(1) oversee liquidation of brokerage firms
(2) insure investors accounts up to max value of $500K (of which only $250K can be cash balances) in the case of bankruptcy of a brokerage firm
ERISA of 1974
(1) enacted to stem company retirement plan abuses & to make sure employees were protected/paid promised benefits
(2) ERISA set standards for participation, vesting, funding, reporting & disclosure
(3) established the Pension Benefit Guaranty Corp (PBGC)
(4) ERISA requires anyone giving investment advise to a company retirement plan must be a fiduciary
SECURITIES ACT AMENDMENTS OF 1975, MAY DAY
(1) directed the SEC to supervise development of a national securities market - based on the assumption that market would extensively use computers and e-comm
(2) prohibited fixed commissions on public transactions, fostering greater competition and more efficient prices
MAY DAY was a day in 1975 when commission rates were no longer set by NYSE but individual firms
GRAMM-LEACH-BLILEY ACT OF 1999 aka FINANCIAL SERVICES MODERNIZATION ACT
(1) dealt w/ ways that financial institutions handle private info of individuals
(2) repealed part of the GLASS STEAGALL ACT OF 1933, which prohibited financial institutions from consolidating and offering any combination of commercial banking, investment banking, and insurance
* some believe this helped contribute to the market financial crisis in 2008 with subprime mortgage meltdowns
COMMODITY FUTURES MODERNIZATION ACT OF 2000
(1) exempted derivatives (i.e. credit default swaps) from regulation by CFTC or any gov regulatory agency
* **led to an explosion in face value (notional) of derivatives, contributing heavily to the subprime mortgage meltdown/financial crisis in 2008
USA PATRIOT ACT
(1) requires BDs/others to have internal policies, procedures, and controls to meet KYC mandate (AML and anti-terrorism)
(2) BDs may ask their IAs to provide more details info on their clients
*advisers should look for red flags like nonsensical transactions, numerous accounts in different names or corps, and client’s lack of concern in inv obj, risks, or inv costs
SARBANES-OXLEY ACT OF 2002
- set up the Public Company Accounting Oversight Board (PCAOB) which have 5 financially literate members, 2 of whom must be CPAs
- generally makes it unlawful to extend credit to any director or executive officer
- has precipitated employment of Chief Compliance Officers (CCOs)
the board is to:
(1) establish/adopt by rule “auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers”
(2) conduct inspections of accounting firms
(3) conduct investigations and disciplinary proceedings
(4) impose appropriate sanctions
(5) requires a CEO and CFO to certify establishing, maintaining, and regularly evaluating the effectiveness of the financial/other info in the issuer’s annual and quarterly reports & whether there have been any significant changes in issuer’s internal controls after eval
DODD-FRANK WALL STREET REFORM, CONSUMER PROTECTION ACT
DODD-FRANK
- the direct result of the 2008-2009 Great Recession
- addressed systemic risk w/in the financial system like “too big to fail”
(1) required banks meet certain capital requirements, go through any stress tests to make sure they could survive an unexpected shock to financial system
(2) regulates derivatives
(3) shifted derivative trading from OTC market to central clearing counterparties (CCPs) that facilitate the netting of swap contracts to reduce systemic risk
(4) contains investor protections in the bill, establishing the Consumer Financial Protection Board (CFPB)
(5) directed SEC to look into fiduciary standard applying to both IAs and BDs
(6) directed the SEC to look into uniform fiduciary standard, w/ the recommended rule of proposals released in Apr 2018
* ** two standards: SUITABILITY STANDARD for BDs and FIDUCIARY STANDARD for IAs
ID SOME MAJOR FINDINGS IN THE RAND STUDY COMMISSIONED BY THE SEC
RAND contacted HHs and held focus groups to find out if investors understood differences between BDs and IAs (confused both fin. professionals and investors)
Many were unaware BDs and IAs are held to different standards, and there was much confusion over credentials and job titles
SEC in 2018 proposed there be limitations on “advisor” or “adviser” because of different marketing ploys using certain titles “Senior Investment Adviser” etc.
WHAT ARE THE 2 MAIN STANDARDS FOR ADVISERS PROVIDING INVESTMENT AND RETIREMENT ADVICE?
depending on the type of adviser involved there are 2 types of standards:
(1) fiduciary standard established under IAs Act of 1940 for RIAs, and
(2) a suitability standard for RR’s and insurance agents
WHAT WERE SOME OF THE KEY CONCEPTS & REQUIREMENTS OF THE FIDUCIARY STANDARD PROPOSED BY THE DEPT OF LABOR?
(1) new rules would have applied to anyone giving advice to a retirement investor about his/her retirement plan; if an adviser was giving advice to a retiree about his/her retirement account (including an IRA), the adviser would be considered a fiduciary and required to look out for the best interest of the client
(2) clients no longer should be forced to waive 100% of their legal rights and accept mandatory arbitration
