August 7, 2018
Dear SEC Commissioners-
The proposed rule changes address a wide range of topics. Here, I seek to address a small subset of the questions that you have posed, from the perspective of a mid-sized investment advisory firm. Small firm would be more appropriate in practical terms however, SEC has specific definitions under which we technically classify as mid-sized.
Regarding the name of the new rule, I suggest labeling the rule with a name that does not include the words "Best Interest". Should the rule finalize with that name, inevitably we will see that phrase used for marketing purposes. Your intent, I believe is to define a standard under which brokerage representatives must behave with public clients. One must be cognizant of the behavior of individuals and firms, seeking advantage in attracting clients, in a competitive marketplace. Unless it is your intent to see individuals and firms marketing themselves as subject to a best interest standard, or subject to the SECs Best Interest Rule, another title might better serve your objective of setting a standard, not creating a marketing phrase. The Commission is undoubtedly aware that the phrase Fee Only has become a marketing phrase, often used in the marketplace to function as some form of indication of superior, less conflicted service. SEC has in fact taken action against individuals and firms who have marketed and gained consumer confidence using Fee Only language, yet as evidenced by SECs disciplinary actions, the reality was that in certain instances the public was served inadequately. The label alone, in such disciplinary instances, although it may have initially brought comfort to the consumer, did not offer assurance that the consumer would be well treated. Best Interest is a much sexier phrase than Fee Only or Fiduciary. Hopefully consumers would seek to learn more about the service provider including professional education, competence, the services being offered, the costs, etc. Left as the proposal stands, many consumers may likely stop asking questions after they hear "subject to the SEC Best Interest Rule". I encourage you to release a clearly defined rule, intended for use by professionals and regulators doing their work, while being cautious to not inadvertently draft someones marketing plan.
You have requested comment on whether there should be federal licensing and continuing education requirements for personnel of SEC-registered investment advisers. The answer is yes, but subject to important caveats. Many standards and continuing education requirements already exist. Individuals holding the most credible designations, such as the CERTIFIED FINANCIAL PLANNER TM mark are already required to meet substantial continuing education requirements. Such individuals should be granted an exemption from additional CE. Persons whose functions are solely clerical or ministerial should be excluded. Whatever requirements SEC might install should be directed exclusively at those individuals actively dispensing advice.
Provision of Account Statements – Investment advisory firms using third party custodians, rely on the custodians to supply authoritative regular statements directly to clients. This already is a strong and effective protection mechanism for the benefit of clients. Introducing a requirement that non-custodial advisory firms must somehow, generate their own independent account statements seems to invite problems, including the possibility that erroneous or fraudulent statements may be relied upon by clients. Clients should instead be educated to examine the account statements sent directly to them, by the independent bank, trust company, or brokerage firm actually holding their assets. Additionally, creating systems for generating and sending additional account statements directly from the advisory firm would be an expensive task, and the risk of data translation errors introduces new potential risks. In short, the existing regime is strong and no change appears justified.
You have requested comment on whether SEC-registered investment advisers should be subject to financial responsibility requirements along the lines of those that apply to broker-dealers. The short answer is NO. When as discussed above, investment advisors use third party account custodians, it is that custodian whose financial strength is an issue. The investment advisors financial strength is of little or no effect. In those limited instances where due to an investment advisors wrongdoing the client has a need to recover directly from the investment advisor, typically insurance acts as the backstop. Requiring net capital to be retained by and inside of the investment advisory firm is unnecessary, costly, and diverts resources the firm may more effectively use elsewhere.
Likewise, net capital or other financial responsibility requirements are unnecessary, create unnecessary burdens for small and midsized firms, and offer little client benefit. I note with interest that your description of the North American Securities Administrators Association Minimum Financial Requirements for Investment Advisers Model Rule 202(d)-1 does NOT appear to impose a minimum net worth on those investment advisory firms that do not accept custody of client funds, or accept discretionary authority. This is appropriate.
Additionally, it is important not to create an incorrect impression that a firm not required to publish information about their own assets is in some manner risky or inadequate. As such advisor does not accept custody or discretion, the risk to the consumer has already been mitigated. Obtaining annual audits of a small non-custodial firms own assets would be an unnecessary expense that provides no consumer protection benefit. You also ask if requiring the advisors own financial information on Form ADV would raise privacy concerns for privately held firms. Not only would this raise privacy concerns, but it increases operating expenses, while offering no client benefit. It is unnecessary.
Thank you for taking up this important task, seeking to serve and protect the public.