Securities & Exchange Commission

Finally, DOL requires Advisors to put client interests first

Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.

          – President Barack Obama, February 23, 2015


 

Screen Shot 2016-04-09 at 8.25.20 PMWe are thrilled with this major step forward proposed by President Obama to correct some of the abuse that can happen when individuals seek financial advice from certain types of brokers and financial planners who are not Registered Investment Advisors (RIAs) (like Tiemann Investment Advisors is, who are held to a high fiduciary standard).  Such individuals receive compensation from  commissions, fees and a range of marketing benefits paid behind the scenes by the financial companies whose products the brokers sell.  These brokers do not have a fiduciary obligation to put the interests of their client first and while some will consider their client’s best interests, a substantial number will sell investment products to their clients based of the size of the commission they—the broker—receives. Unfortunately, the bigger the commission, typically the worse the product.  The new rule, described in more detail below by this U.S. Department of Labor Fact Sheet, is estimated to potentially protect and save middle-class investors billions of dollars every year once it is passed and in effect, although this will likely take until […]

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SEC raises concerns on mutual fund fees

For many investors, mutual fund fees are among the largest hidden costs of investing. They can be confusing, too. Fund companies can charge investors a variety of fees, and according to this guidance from the U.S. Securities and Exchange Commission, some fund companies may not be characterizing their expenses correctly.  This should be a little alarming to those investors who think they have a handle on what the fees they are paying for holding mutual funds.  The problem lies in the murkiness of fee reporting by these funds, which are required to account for fees differently, depending upon what type of fee it is.  If it is a shareholder and record-keeping fee, it is called a “sub-accounting fee.”  If it was a fee that pays for activities that result in a sale of mutual fund shares, those are considered “distribution fees.”

According to “U.S. regulator warns mutual funds on mischaracterising fees,” a Reuters article published January 6, 2016, “Mutual funds may be misdirecting fees, which has the potential to hurt investors’ returns, the U.S. Securities and Exchange Commission said in guidance it released on Wednesday, after examining some mutual funds, investment advisers, broker-dealers, and transfer agents.”

In particular, the SEC raised questions as to whether payments characterized as sub-accounting fees where actually “used to pay for activities that are primarily intended to result in the sale of mutual fund shares.”

The SEC has been examining how mutual funds are handling certain fees but, in its recent guidance, […]

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Fiduciary Blurt

By Dr. Jonathan Tiemann

In my childhood, my favorite cartoon was The Adventures of Rocky and Bullwinkle, a Cold War-era sendup of the popular cloak-and-dagger movies of the day. The heroes, Rocky the Flying Squirrel and Bullwinkle T. Moose, always managed, in their bumbling way, to thwart the arch-villains, Boris Badenov and Natasha Fatale. In one memorable adventure, Boris and Natasha plotted to destabilize the American economy by flooding the market with counterfeit cereal boxtops, the kind you used to be able to send in for premiums and prizes. They were successful enough at first that the Chair of the Federal Reserve, a man called Fiduciary Blurt, went on television to appeal to the public for calm.

Fiduciary is one of those words most of us only hear now and again, and we seldom hear it in the news. But we have heard it in the past couple of weeks in connection with a new rule the US Department of Labor is considering that would require all advisors giving investment advice to retirement plan participants to act as fiduciaries. Fiduciary duty is the affirmative obligation on the part of any agent acting on behalf of another (a principal) to place the principal’s interests first. By law and custom Registered Investment Advisers (RIAs) owe a fiduciary duty to our clients, and for most of us, that corresponds with how we view our responsibilities anyway. Brokers, on the other hand, generally have no such duty, although may confuse the issue by referring to […]

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SEC Fiduciary Panel Seeks to Raise the Investment Advice Standards for Brokers

October 8, 2013 — In what might cause the biggest uptick in quality of service for investors since the 1940’s, a subcommittee of the Investor Advisory Committee to the SEC has just circulated a draft proposal recommending that the SEC proceed with a rule requiring brokers to PUT THE BEST INTERESTS OF THEIR CLIENTS BEFORE THEIR OWN when providing investment advice. This has not been a requirement for brokers prior to now, however, this is currently the standard that registered investment advisors (RIAs) such as Tiemann Investment Advisors must meet when providing investment advice or services. Although the October 10th, 2013 meeting of the Investor Advisory Committee has been postponed due to the federal government shutdown, the subcommittee’s proposal could be voted on by the committee in a teleconference at any time.

Another industry group, the Securities Industry and Financial Markets Association, also submitted a recommendation to the SEC to improve the fiduciary standard used by brokers. Its recommendation did not seek to bring brokers all the way to the level of RIAs but called for the SEC to device a new standard that enables brokers to still sell proprietary products and provide other exemptions for conflicts that are “disclosed.” Conforming the higher standards required of RIAs to brokers is a challenge because of the difference in their business models and often skill sets but according to Barbara Roper, a member of subcommittee, the recommendation “is not an attempt to change all brokers into advisers. We bent over backwards […]

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SEC Adopts Custody Rule Changes For Investment Advisors

In 2009, the SEC adopted amendments to the custody and recordkeeping rules under the Investment Advisers Act of 1940 to provide additional safeguards when a registered adviser has custody of client funds or securities, providing greater guidance and stronger protections for investors. TIA was then (and still is) pleased with this improved rule change. The final rules require the adviser, among other things:
1. to undergo an annual surprise examination by an independent public accountant to verify client assets;
2. to have the qualified custodian maintaining client funds and securities send account statements directly to the advisory clients; and unless client assets are maintained by an independent custodian (i.e., a custodian that is not the adviser itself or a related person),
3. to obtain, or receive from a related person, a report of the internal controls relating to the custody of those assets from an independent public accountant that is registered with and subject to regular inspection by the Public Company Accounting Oversight Board.

Finally, the amended custody rule and forms will provide the Commission and the public with better information about the custodial practices of registered investment advisers. The amendment goes into effect on March 12, 2010 and registered advisors must comply with the new rules as of that date.

The highly publicized losses by virtually all investors with Bernard Madoff and numerous other advisors focused public attention on investment custodial issues and the need to strengthen requirements for the safekeeping of client assets. The purpose of the new custody rule amendments is to impose additional controls on registered advisors that have access to client funds or securities. The primary tool for this is independent verification of the assets. The form of such verification varies depending on the nature of the advisor’s access to or control over the assets.

While subject to the new rules, TIA has always made it a policy and practice to maintain the custody of client funds with the clients directly. Thus, TIA never seeks nor gets custody of any client funds.

All SEC-registered investment advisors will be required to comply with the enhanced custody rules. The amendments will be effective March 12, 2010, and registered advisors must comply with the new rules as of that date, except in certain cases where other compliance dates are specified.

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