Weil Capital Management, LLC
From: Curt Weil [firstname.lastname@example.org]
April 9, 2003
In your proposals for increased compliance reviews of Registered Investment Advisors (RIAs) the commission draws, repeatedly, a connection between incread compliance monitoring and reductions in violations. While this is, no doubt true, nowhere in your analysis do do I find any documentation of "harm to investors" by advisors. And you do not, by any demonstrated fact or study, prove that the current, low cost compliance, provides more opportunity for harm than would your proposed high cost program.
Since advisors usually have only a Limited Power of Attorney for clients (rather than the custody exercised by all stock brokers,) I believe that the management practices of advisors significantly reduces the opportunities for harm to investors. Please examine the number of disciplinary actions taken against stock brokers, on a per-capita ratio, to those enforcement actions that the Commission has had to take against advisors – I believe you will find a gross disparity in favor of advisors.
Advisors need a compliance program. We are required, by examiners at least, to have one. We have an active program. What we have costs a reasonable amount and that cost is commensurate with the risk our clients run – low. You have provided no evidence that a much more costly program would produce a result commensurate with the reduction in risk. This proposal smells of having been designed with extremely large organizations in mind, with no thought as to the “collateral damage” to thousands of smaller advisors.
The cost of hiring a compliance professional (and who would certify such a person?) alone would add significantly to the $6,000 a year that I currently spend on such services, not to count the management time devoted to compliance issues.
A fidelity bond (in addition to the ERISA bond I currently pay for!) would add another perhaps $20-25,000 to our costs, which would require that I lay off an employee in order to remain profitable, with, as far as I can see, no significant addition to client safety.
I already carry Errors and Omissions (E & O) Insurance to cover most potential investor issues. I never take “custody” of client assets, which protects them from mis-appropriation, and me from the expenses of audits and fidelity insurance.
Regarding the proposal for compliance reviews by a third party Self Regulatory Organization (SRO), I believe the current system of state and SEC compliance responsibility works to perfectly appropriate – in fact, delegating this responsibility to an SRO could be seen as dereliction of duty, given the authorizing legislation that created the S.E.C.
So far, no no data have been provided to show that the current system is not working and needs repair.
Worse yet, my perception is that the leading organization to fill such a role is the NASD. This would be a perfect example of hiring the fox to guard the henhouse! The NASD has a perfectly miserable record of managing the compliance of its’ member firms and their representatives, witness the pages filled with 6-point type detailing after-the-fact sanctions against firms and representatives that periodically appear in the Wall Street Journal.
Functionally, advisors differ radically from those currently “supervised” by the NASD – we are fiduciaries, putting our clients’ interest first; they are sales-people. We are paid fees by our clients, they earn commissions paid by their firms or by the producers of the products they sell. The differences are huge, the similarities (we both are involved in investing) tiny.
The organization best suited to over-see advisors is the S.E.C. or its state counterparts; if the Commission is bent on escaping its’ duty, then perhaps the CFP Board of Standards might be willing to consider the task.
Curt Weil, CFP ®