In the ongoing debate over whether to impose a fiduciary standard on brokers, I've heard some discussion over whether to require disclosure of conflicts of interest. Maybe I'm missing something but why are some folks so opposed to providing disclosure?
— A.S., Florida
The concern is that if a new fiduciary standard allows for disclosure of conflicts of interest, the extension of that line of reasoning will permit brokers to ask clients to waive the disclosed conflict. This could cause the requirement to wind up being a paper tiger since many clients will sign whatever is put in front of them without giving it due consideration. Consequently, the other side of the table is arguing that any new fiduciary standard should simply require that conflicts be avoided altogether. Those in favor of allowing disclosure assert that there are some conflicts that are simply unavoidable and clients should be allowed to make their own informed decisions as to whether they want to waive the conflict.
Not to be immodest, but I have a lot of clients who love me and are constantly telling me what a great job I'm doing for them. I'm thinking of putting together an advertisement that would use some of their comments as testimonials. Is that permitted?
— T.K., Ohio
FINRA Rule 2210(d)(2) requires that "advertisements or sales literature providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: (i) The fact that the testimonial may not be representative of the experience of other clients; (ii) The fact that the testimonial is no guarantee of future performance or success; (iii) If more than a nominal sum is paid, the fact that it is a paid testimonial." In addition, you'll need to get approval from a registered principal of your firm and submit the advertisement to FINRA for approval.
As a registered investment advisor, we have allowed (with our broker-dealer's approval) certain of our advisor representatives to engage in outside business activities. Recently, however, our broker-dealer has indicated that due to the new FINRA rule on outside business activities, they are thinking of prohibiting all such activity. Has the new rule changed the way broker-dealers have to supervise outside business activities?
— F.R., Pennsylvania
On Dec. 15, 2010, FINRA Rule 3270 replaced NASD Rule 3030. The only real substantive difference between this and the new one is that Rule 3270 requires prior written notice when a registered representative will be compensated, or has reasonable expectation of compensation, as a result of an outside business activity. The old rule only required prompt written notice. This supplementary material, while not actually a part of the rule, is likely to be considered by FINRA as a requirement that should be addressed in the a firm's written supervisory procedures (WSPs) or, at a bare minimum, as "best practices" for conducting outside business activity reviews. The supplementary material states that a broker-dealer must consider whether the proposed activity would interfere with, or compromise, the rep's responsibilities to the firm or the firm's customers, or be viewed by customers or the public as part of the firm's business based upon certain factors.
After such review, the firm must then decide whether to impose conditions or limitations on the activity. The supplementary material also states that firms must keep a record of their compliance with these obligations. The question is whether the codification of these requirements is any different from the obligations that firms have always had with respect to outside business activities.
The intent behind the original rule was for firms to decide whether to allow the rep to continue the outside business activity. How a firm provided evidence of its review and approval was up to the firm. However, firms have always been expected to address and describe their supervisory procedures relating to outside business activities in their WSPs. As a starting point, you should look at your broker-dealer's policies and procedures manual concerning outside business activities.
Assuming it has a policy in place for reviewing and approving outside business activities, you should be able to demonstrate that the current policies and procedures are in compliance with the obligations set forth in the supplementary material. In the event that the firm has no specific procedures addressing outside business activities, you may have to explain how the obligations in the supplementary material are no different from their current procedures.
Is it permissible for a registered investment advisor to deliver their Form ADV disclosure to its clients on a CD?
— D.R., Florida
In August 2010, the U.S. Securities and Exchange Commission issued Release No. IA-3060, which provides the new rules for preparing and delivering the Form ADV.
While the release addresses the many changes to the Form ADV, it confirms that advisors who want to deliver their ADVs "electronically" to clients must comply with the SEC's guidelines regarding electronic delivery of information (Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisors for Delivery of Information, Investment Advisers Act Release No. 1562, May 9, 1996).
That release explained that the SEC saw a difference between documents that were delivered on paper through the mail and documents delivered electronically. The federal agency's focus is whether the method of delivery provides "timely and adequate notice that such information is available electronically."
The SEC made a distinction between the type of media used to deliver the information by considering the likelihood that the client who receives the "document" would be on notice that it contains information they should review.
The regulatory agency specifically stated in that release that "if information is provided by physically delivered material (such as a computer diskette or CD-ROM), or by electronic mail, that communication itself generally should be sufficient notice.
If information is made available electronically through a passive delivery system, such as an Internet website, however, separate notice would be necessary to satisfy the delivery requirements unless the broker-dealer, transfer agent, or investment advisor can otherwise evidence that delivery to the customer or client has been satisfied."
But, I would add one caveat. Since the release was issued almost 15 years ago, electronic media has changed drastically. You would be hard-pressed to find anyone with a computer these days that still accepts diskettes. While most computers still have CD drives, you might be wise to include a separate cover letter with the CD advising the client that it contains important documents for their review and offer to provide them with a paper copy if they are unable to access the material.
I see that the new Form ADV requires that investment advisors provide an explanation of the minimum qualifications required for each "professional designation" listed by the advisor. Does this include titles such as CPA and Master's degrees or just industry specific designations such as Certified Financial Planner?
— C.O., North Carolina
SEC Release No. IA-3060 requires that an advisor provide an explanation of the qualifications required to obtain a professional designation that the advisor lists on his or her ADV Part 2B in order to provide clients with more clarity concerning the many different certifications available to investment advisors.
While there is no specific definition in the release of what constitutes a "professional designation," the American Institute of Certified Public Accountants has issued guidelines for CPAs to use in drafting the explanation. Consequently, it would seem that a CPA designation would be included in the requirement.
Since each state has slightly different requirements for licensing CPAs, it would be a good idea to check your state's specific requirements. But, I would think a Master's degree could be listed under the education section, rather than as a separate "certification."
Alan J.Foxman, is an attorney in private practice
in Boca Raton, Fla. He also works as an
independent contractor with National Compliance Services
Inc. He can be contacted at this email address.
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