David Massey, the deputy securities administrator for the state of North Carolina, began a one-year term as president of the North American Securities Administrators Association (NASAA) in September. He spoke to On Wall Street contributor Jaime Levy Pessin about this year's goals for the organization, which is comprised of securities regulators from all 50 states.
1. What are your priorities for NASAA in 2011
Number one on our priority list is that financial professionals who provide investment advice be subject to fiduciary duty. Investment advisors are already subject to the fiduciary duty, and the brokerage industry has been incorporating an advisory role. The dividing lines that formerly separated the public's concept of a stockbroker and investment advisor have gotten pretty fuzzy. NASAA would like to see the Securities and Exchange Commission adopt a fiduciary duty requirement for brokers who provide investment advice so the broker would be required to act in the client's best interest and disclose any conflict of interest.
2. What kind of objections are you getting from the brokerage industry
I think they perceive that the fiduciary duty is going to require a lot more disclosure. But if you're making recommendations to clients about what kind of product they ought to buy and which is best for them, then you ought to be legally required to act in their best interest, because that's what the clients think the broker is supposed to be doing anyway.
3. How would state regulators' roles change under the new financial regulations
The most visible change we're going to be seeing is that approximately 4,000 investment advisory firms that previously were registered with and regulated by the SEC are going to be moved by next July to regulation by the state agencies. Now, if you're an investment advisor and you don't manage more than $25 million of client assets, you register with the states. If you manage more than that you register with the SEC. The Dodd-Frank bill moved that threshold up to $100 million.
4. How are the state regulators preparing for that increased work load
NASAA has developed an outreach program to investment advisory firms within the $25 million to $100 million window to explain what kind of regulations they will be subject to once they move to state regulation. Also, NASAA has developed a risk assessment module, an analytical program that points out which firms are more likely to merit on-site audits frequently. If an investment advisory firm has custody or discretion over a client's account, has possession of the cash or the securities, or if it has the ability to effect purchases and sales in a client's account, that firm might deserve more scrutiny than a firm that was just doing financial plans. Here in North Carolina, we've added staff in anticipation of doing more audits, we've incorporated the risk assessment module and we've started having presentations in major cities for all advisors that are expected to be registering with us. We tell them what an audit is like, what kinds of questions we will ask, what they can expect following the audit and how we iron out problems.
5. Why is that communication with the firms so important?
Knowledge of the regulatory process is much more comforting than not having any idea of what to expect at all. I call it intelligent regulation. It makes sense to me to go out and form a connection with those firms you expect to be legitimate and lawful professionals so that you can conserve your resources for chasing the bad actors in the business. I'd rather work with a firm on the front end to help get things right rather than engage in a game of 'gotcha.'