Advisors and their representatives are lining up in opposition to an SEC proposal seeking to overhaul the ways they safeguard assets they've been entrusted by clients.
The Securities and Exchange Commission
But it's another provision that financial planners were most concerned about in comments
Dennis Markway, the founder of Iron Horse Wealth Management in Johnston, Iowa, said most of his clients choose to allow his firm to conduct stock and other transactions without having to get permission for each individual trade. Such "discretionary trading" — as it's technically known — is popular because it prevents advisors from having to obtain investors' permission every time they want to carry out some piece of business.
"They are aware that they are relinquishing control to us," Markway said. "That's specifically what they're hiring us for."
Among other things, the pacts would pledge the custodian to provide records on investor assets on request. As a protection against bankruptcy, custodians would have to have investor assets set aside in funds that would be shielded from creditors.
RIA lawyers, a New York-based firm representing financial planners,
Max Schatzow, a founder and partner at RIA Lawyers, said, "It seems ridiculous to tell small advisors, or really any advisors, that they have to enter elaborate written agreements with these banks, broker-dealers and trust companies that they have no business relationship with and that their clients have independently selected."
"These qualified custodians have little to no incentive to enter into a written agreement with the smaller investment adviser," RIA Lawyers wrote in its comments to the SEC. "In fact, these qualified custodians often have investment advisers, banks, or trust companies that compete with these smaller investment advisers.
The Investment Company Institute, which represents mutual funds and similar investment vehicles,
"The Proposal would equate an adviser's discretionary trading authority over assets with having custody of those assets for the first time," the Investment Company Institute wrote. "We oppose these changes because doing so is unnecessary and yet will create a significant number of practical difficulties."
SEC figures support the notion that most clients give advisors discretionary authority to trade on their behalf.
SEC officials have said their proposed changes to the custody rules come in response to recent technological changes and other trends related to investing. SEC Chairman Gary Gensler has said he wants to make sure that clients who turn to advisors for help
The custody rule, added to the Investment Advisers Act in 1962, has not been revised since
The Investment Adviser Association, another opponent of many of the proposed changes to the custody rule,
"Many requirements of the proposed rule would compel the adviser to police commercial terms between clients and custodians on matters unrelated to the investment advice provided by the adviser," the IAA wrote.
Another point of contention for the IAA: The length of time the SEC would give firms to come in compliance. If the federal regulator gives the rule final approval, advisors with $1 billion or less of assets under management would have 18 months for compliance. Firms with more AUM would have only a year. The SEC estimates that 10,454 advisors, or nearly 70% of all registered advisers in the U.S., would come under the 18-month deadline.
IAA officials wrote that they appreciate the additional time that would be granted small firms.
But, the IAA wrote, "given the scope of work that will be necessary for advisers (and custodians) to implement the Proposal, as described throughout this letter, however, the proposed implementation periods are too short."