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Financial advisors beware… new legislation and regulations have been enacted, and you will face new hurdles conducting your daily operations.  But, in this case, new does not necessarily mean improved. During times like these, regulators feel the need to do something, even if that something turns out to be wrong down the road. 

Likewise, trial lawyers are circling their wagons, seeking out wronged investors with claims that “unscrupulous” financial advisors failed to meet their fiduciary obligations.  As the credit crisis morphed into the full-fledged collapse of the global financial system, nervous investors watched their portfolios dramatically decline in value.  Now they are looking for answers, if not more, and the promises of those lawyers sound too good to pass up.

Now that the election season has ended, legislators and regulators alike will focus on fixing the financial crisis and not just talking about it.  They may begin proposing new rules and regulations to improve the seemingly broken system.  Financial advisors need to monitor these proposals closely, as their very livelihoods will be impacted. 

Here are a few regulatory areas that will be addressed in the days, weeks, months, and years to come.

Expanded Powers for FINRA

FINRA (the Financial Industry Regulatory Authority) has been looking to expand its regulatory reach beyond broker-dealer compliance to become the primary regulator over mutual funds, insurance, investment advisors, and even mortgage brokers.  Some investment advisors tend to ignore FINRA, believing they are immune to its oversight and only brokers must answer to them.  Others remain fearful of all regulators; lawyers and consultants often use the mere FINRA name to scare members into paying for unnecessary services.  Should FINRA’s role expand, such scare tactics will become realities and advisors will be forced to answer to another regulator.  Additionally, as FINRA gains even more authority, many independents worry that they will lose their voice in the industry, as the larger firms exercise greater control, particularly over such issues as rulemaking.   

Principle- vs. Rules-Based Regulations

Since its creation in 2007, FINRA has incorporated more broadly interpreted principle-based regulations while consolidating the NASD and NYSE rulebooks.  Moving forward, expect the regulators to apply certain “must do” rules-based regulations regarding compliance issues.  Smaller independents remain concerned that the rules-based approach does not adequately consider them; very little is left to interpretation as decisions are consistent and uniform regardless of the size of the underlying firm or business model used.   

Greater Oversight over 529 Plans

Currently these education savings accounts are regulated by the MSRB (Municipal Securities Rulemaking Board), and not the SEC (Securities and Exchange Commission), so investment advisors have believed they are immune to direct oversight.  Expect Congress to take a more active role in protecting these education accounts by giving FINRA a greater regulatory role as the SRO consolidates its power.  As a result, some advisors may be less likely to recommend 529s.  

Hedge Funds

This industry is sure to face increased oversight, and regulators are likely to target leverage and reporting transparency first.  With other regulations likely to touch on custody, ethics (insider trading) and controls, hedge funds may soon be facing what the SEC likes to call a "culture of compliance."  In other words, this “gotcha” regulatory mentality generally implies "we will get you for everything."

A Little Refresher Course

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