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Up Front News


Funds Not Alone in SEC's New Compliance Crusade

The Securities and Exchange Commission has been keeping pretty busy lately with its new proposal on improved compliance programs for investment companies and investment advisers.

Although the bulk of the proposal is centered around whether the SEC should create a separate organization to supervise mutual funds and advisers, there are some smaller potential changes that would affect a key partner to fund companies: financial advisers.

One in particular that the agency is considering is whether it should require investment advisers to hold additional insurance in case of employee theft or fraud.

Called fidelity bonds, the minimum coverage of $25,000 costs about $400 per year. Broker/dealers and advisers who manage ERISA plans are currently required to obtain fidelity bonds, but now the SEC is considering that the 7,790 advisers it supervises obtain the insurance as well.

It is unclear at this point exactly which advisers this rule would apply to or whether there would be certain exemptions. For example, if the SEC decides that the rule would extend to all advisers, planners said that this would be just another example of how the agency does not understand the difference between a financial planner - especially those that are fee-only - and an investment adviser.

The SEC declined to comment on the proposal.

"Why they would want advisers to have a bond in case of theft or fraud? My question is would that have any impact on advisers who don't have custody of any money?" asked Robert Glovsky of Mintz Levin Financial Advisors in Boston. "Planners without any custody can't do it by definition."

Glovsky added that if the SEC did decide that all advisers needed to purchase the fidelity bonds in order to give consumers more protection then, of course, he would comply.

"Hopefully this would be clarified before adopted, and it will make sense for which investment advisers will be required to have a fidelity bond," said Marianne Czernin, director of broker/dealer client services at the National Regulatory Services in Lakeville, Conn. (NRS is a sister company to Thomson Media, publisher of this newsletter.)

Jerry Wade, of Wade Financial Group in Minneapolis, said he's concerned about the cost of the bonds. The firm is already required to obtain them because it works with pension plans, so adding another bond would not be a large hassle.

The bond is "essentially a demonstration of financial capital against loss," said Bud Bigelow, chief executive of Burlington, Vt.-based Cambridge Alliance, a provider of errors & omissions insurance for advisers. But, Bigelow, continued: "It's basically not worth a lot because it still leaves the employer holding the bag. It isn't insurance in that it's a risk transfer."

Compared with other expenses, Bigelow said that the costs for fidelity bonds are nominal. "It's a pretty rare event," he said, adding that in his 13-year experience, he's seen only one case of embezzlement.

Wade believes that the SEC is focusing on the wrong agenda. "I would view this as a tax against all financial advisers," Wade said. "The SEC and NASD need to do a much better job of cracking down on the existing rule [violations]."

Planners have until April 18 to submit their views to the SEC.

Laurie Kulikowski is Online Managing Editor of Financial Planning Interactive.com

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