Pennsylvania Investment Observer

Regulation and Compliance

by Judy L. Loy

If you will excuse me this month, I am on my soapbox prepared to rant. I will admit that I am no Dennis Miller, in more ways than one, but I am tired: tired of regulation, paperwork, compliance and the like.

First off, let's talk about laws. Many laws are passed as a knee jerk effect to a situation without the ramifications being thought through. One such mammoth mistake is the Sarbane-Oxley Act of 2002. This was in response to the Enron disasters of the world. I certainly don't want another Enron situation, if one can be avoided, and Sarbane-Oxley is meant to allow for better financial reporting. The problem I have with Sarbane is it making mandatory that corporations use approved large CPA firms to audit them annually. This is supposed to protect shareholders from malfeasance on the part of corporate bigwigs. Guess what? They didn't put any caveats in the Act for privately held businesses and/or small businesses. In response, when the Act goes into effect for my small firm, my annual audit will go from $3,000 to as much as $22,000! (Who says inflation is dead?) Who are they protecting in our situation? Well, we have two shareholders who own and operate our firm and seven other employees. The only damage we can do is to ourselves. In addition, we already adhere to NASD rules of an independent CPA audit every year.

The next rant is in regards to breakpoints. For those of you not familiar, breakpoints were created by mutual funds as a sales tool. The NASD recently made breakpoints a regulatory issue. Breakpoints are discounts given on sales charges for clients with large chucks of change (usually $50,000 and over) at one mutual fund company and were meant to draw more money to the fund family. It sounds wonderful in theory, and the mutual funds allow linkage of accounts for family members. What family members, you ask innocently? Well, it depends on the fund family. To put it plainly, this sales tool created by mutual fund companies is mired in intricacies the likes of which I have never seen. Each mutual fund company has different rules, different definitions, and are unable to link accounts for their own breakpoint discounts. In one instance, a fund family was unable to give the breakpoint discount for two custodial accounts because the other funds that enabled the breakpoints were held at a different firm in ‘street name.' We basically had to tell the client to move their accounts to the other broker so that they could get the discounts that they deserved. It's just what I always wanted to do, get rid of good clients due to regulation.

In a recent article in Research Magazine (March 2004), an article titled, "Compliance Fatigue," the issue of the increasing burden of regulation in our industry was reviewed. While I believe most regulation is necessary and important for the protection of investors, I agree with a quote from the article from Chip Rhome, of Tiburon Strategic Advisors. He said, " It's a bit like airport security. It's the 79-year old lady they search…the natural reaction is more regulations, more rules, more policy. I'm not sure we need more regulations as much as some people might need more ethics. We have plenty of rules already." I will stop here. I could go on about the Privacy Act, about regulators more worried about fees than good advice, but I will stop there. I need to get off my soapbox now and get back to work.

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