Securities and Exchange Commission Chair Jay Clayton said the revised standards of conduct for broker/dealers and investment advisors can benefit state regulators trying to curtail the efforts of ethically errant advisors.
Clayton made the comments during a Q&A session at a conference on community-based financial fraud at Fordham University School of Law in Manhattan on Friday. New York State Assemblyman Robert Smullen asked Clayton how state and federal regulators could work in concert to help investors, and Clayton cited the Form CRS as a useful tool states could employ.
“One of the things we’ve done in our Standards and Conduct Rulemaking is requiring this form for broker/dealers and investment advisors that says, ‘customer, here’s how I make my money, here are my conflicts, here’s where to go,” he said. “This is the first time they’re in very short, plain language. People have to step up for what they’re actually doing. So, to the extent the states use that as part of their enforcement inspection mechanisms, I love it.”
As a part of the revised rules, broker/dealers and investment advisors must offer a customer relationship summary to investors at the outset of their relationship. According to an analysis of the changes by the law firm Sullivan & Cromwell, the newly-revised Form CRS must include, “among other things, information about the relationships and services a firm provides to retail investors, disclosures regarding applicable standard of conduct, fees, costs, conflicts of interest and the firm’s disciplinary history.”
At one point, Clayton also expressed concerns he had about self-directed IRAs, which offer account holders more leeway in their investment choices than a conventional IRA.
“I have great skepticism (that’s the nice way of saying what I’d like to say) for self-directed IRAs,” Clayton said. “They have the veneer of legitimacy; maybe they are and maybe they aren’t, but they don’t have the protections that other retail investments have.”
The Q&A was led by Marc P. Berger, Director of the SEC’s Regional Office, who asked Clayton about strategies investors can use to avoid potentially corrupt advisors, and he said he wanted the SEC to make it as simple as possible for investors to find out if their advisor is registered and subject to inspection, or whether they’re “dealing with somebody who’s a ghost.”
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