Wall Street Wars VII: SEC Chairman to RIAs – “Greetings” – A Regulator on Steriods?

As a review: Instead of charging commissions to sell investments and products to their clients, as do brokerage firms, investment advisors charge a small percentage to advise clients how to invest their money. Wall Street decided this would be a lucrative addition to their business, but did not want to owe a fiduciary duty (of good faith) to their clients as required by the Investment Advisors Act of 1940. They therefore had their politically appointed friends at the SEC exempt them from registering as advisors. This was called the “Merrill Rule.”

Investment advisors then cried foul and their largest association filed suit against the SEC. A few months ago, they won! After brooding for a few weeks but realizing the SEC had no power to exempt anyone from the law, the SEC’s Chairman decided not to appeal. Instead, the Wall Street-friendly former Congressman began his retaliation.

The SEC Chairman first, without waiting for others at the SEC, personally asked Congress to investigate certain practices of investment advisors. The SEC then sprung a hasty investigation of some investment advisors and soon reported only one had properly disclosed facts in its performance claims.

Appearing to have now become a “regulator on steroids,” the SEC is this week sending “Greetings” letters to RIAs. (These are reminiscent of letters sent during the Viet Nam War Era to notify young men they had been drafted, which began with “Greetings!”) Such letters begin with a summary of the key provisions of the Investment Advisers Act.

The letter is being sent by email and is posted to the SEC’s website. The goal is to “educate newly registered advisers about their compliance obligations” to promote investor protection, the Securities and Exchange Commission said in a statement. The letter also introduces advisers to their local office of the SEC and directs them to its website.

Of the 10,500 or so investment advisors registered with the SEC, which is expected to continue to increase. Approximately one-third have become registered in the past 18 months. Perhaps the letters will alert both old and newly registered RIAs that challenging the SEC may be hazardous to their health.

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. To learn whether we may be able to assist you to recovery losses contact us to arrange a free consultation with one of our attorneys.