Another D.C. Threat

One would think with all the problems spooking the world and the financial markets these days that the folks in Washington would have more on their mind than regulating independent financial advisors. To be sure, most of them probably do.

When President Bush named Harvey Pitt to head the Securities and Exchange Commission almost two years ago, several observers noted to me that he knew more about securities laws than anyone in the United States. One veteran securities attorney, a former SEC official, intimated to me that Pitt was contemplating a rewrite of the securities laws to bring regulations first conceived in the 1930s into the 21st Century. At the time it didn‚t sound like a bad idea.

However, Pitt‚s parting gift to the nation turns out to be a proposal to alter the regulation of financial advisors, mutual funds and others. The reasoning is that the SEC today is overwhelmed with trying to sniff out accounting fraud and policing some outrageous behavior on Wall Street.

One certainly can‚t argue that the SEC has a lot of free time on its hands. But Pitt‚s farewell suggestion to either create a separate self-regulatory organization (SRO) to regulate mutual funds and advisors or turn that regulatory responsibility over to an existing group–most likely the National Association of Securities Dealers–raises issues of is own.

Whatever else one says, the mutual fund industry and the advisory profession are two of the most scandal-free sectors of the financial services business. Both groups often get bogged down in minute territorial issues, prompting some in Washington to view them as just two more special interest groups pursuing their own self-interest.

A good example is the mutual fund industry‚s attempts to fight expanded disclosure of portfolio holdings and proxy votes. Fund executives became so consumed in fighting these changes they painted a self-portrait of a narrow-minded lobby. It was reminiscent of the Democratic Party‚s illogical campaign during last fall‚s election, in which its platform was little more than a call to fire Harvey Pitt. Even if the Democrats were right, Pitt was hardly a major factor in most voters‚ lives. Had the fund industry tried to get out in front of the scandals sweeping Wall Street and corporate America (but not their own activities), they might be better positioned to control the direction of any future changes.

Their political missteps provide financial advisors with a road map of how not to lobby. Advisors need to educate Washington about reforms regulating their business that occurred only half a decade ago. Responsibility for policing the profession was split between the SEC, which now regulates large advisors, and the states, which regulates small advisors (those with less than $25 million under management).

This new system may not be perfect, but there have been remarkably few scandals involving advisors over the last five years. The NASD continues to regulate the sales activities of commission-based advisors as it has for decades.

Advisors also need to make Washington aware that the financial planning business didn‚t always have a clean image. Nor did it deserve one. Back in the 1980s, when real estate limited partnerships were all the rage, many planners were seduced by the allure of high commissions into selling these products. Millions of investors got burned.