Financial advisers' pasts have always been able to haunt them, thanks to rules that give the public access to records of disciplinary troubles and legal scrapes. Now new rules will push those skeletons even further out of the closet.
Until now, clients could look up an adviser's background on publicly available websites. But in coming months, investment advisers' firms will be obliged to send disciplinary information to every advisory client, along with an overview of the adviser's educational background and professional experience.
The new rules are part of sweeping changes by the Securities and Exchange Commission to improve methods of disclosure. They will cover investment adviser representatives who work at brokerages, which are overseen by the Financial Industry Regulatory Authority, and for the registered investment advisory firms that the SEC itself supervises.
The SEC has given advisory firms some guidance on what disciplinary events have to be disclosed, but has left things a bit open-ended. This means the onus will often be on advisers and each firm's compliance officers to decide if a past transgression warrants disclosure. However, an omission could get them in trouble later if regulators or clients decide it deserved to be revealed. It's also to be seen how closely clients will read the disclosure document, a lengthy laundry list of information known as Form ADV.
Still, advisers who have records have several reasons to be wary of the new rules and how new attention to their records could impact their business. As disclosure rules have grown tougher since the 2008 financial crisis and the scandals like Bernard Madoff, clients have gained access to more detail about advisers' histories. While much of the information is pertinent to choosing the best adviser, in some instances advisers have found very old or possibly irrelevant incidents are included. Attempting to expunge these items can be difficult and costly.
Investors can now find disciplinary histories of their advisers on BrokerCheck, a database run by Finra, and the SEC's Investment Adviser Public Disclosure website. Finra said that 14.5% of the roughly 632,000 registered representatives on BrokerCheck have at least one disclosable event.
The SEC lists certain types of items that must be disclosed if they occurred within the past decade. These include an array of criminal and regulatory events. But beyond that, things get subjective: The SEC says that anything material that isn't on its list must be included. Also, if something that occurred more than 10 years ago remains relevant, it should be included, the agency says. Lawyers say it's up for interpretation whether a dismissed claim for damages, for example, should be disclosed.
All this uncertainty brings up interesting legal questions: What if, for instance, an adviser was convicted a long time ago of shoplifting? Is this a youthful transgression that is no longer material or an incident that shows a propensity for theft? Patrick Burns, a California securities lawyer, gives this advice to his adviser clients: When in doubt, disclose.
As a rule of thumb, if an incident is on the SEC or Finra databases, it should go on an adviser's Form ADV, said Jacob Zamansky, a New York securities lawyer.
One East Coast-based adviser with Bank of America Corp.'s Merrill Lynch said he's fine with the new rules, even though he thinks he'll have to disclose a dismissed claim regarding the sale of auction-rate securities.
"In a perfect world, I certainly don't want it to go on there, but I don't think it's something that's going to damage any relationships that I have," said the adviser, who asked that his name not be used.
He was supportive of the rules, and said they could drive some advisers with bad records out of the industry. "As difficult it is to earn a living in this business, now you're going to add this?" he said. "Some people aren't going to want to answer these questions."
Advisers will have to start delivering these new disclosures to new clients by July 31 and to existing clients by Sept. 30. They can be sent electronically or by mail.
