COMPLY-FINRA reignites efforts to oversee investment advisers

Wed Nov 21, 2012 7:59am EST

Nov 21 (Reuters) - Wall Street's self-watchdog is banging the drum again about expanding its oversight beyond the brokerage industry, to the businesses of registered investment advisers.

The Financial Industry Regulatory Authority, which has been lobbying for years to expand its reach, was quiet about the issue leading up to the U.S. presidential election.

Investment advisers are vehemently opposed to a self-regulatory organization and prefer to remain under the watch of the U.S. Securities and Exchange Commission.

But last week a FINRA official offered a very public view of why investment advisers should warm to the idea of its oversight: FINRA and other self-regulatory organizations are in an ideal position because they are no t held "captive" by the industries that fund them, nor are they insensitive to their business needs, Thomas Selman, FINRA executive vice president of regulatory policy, said at an industry conference.

FINRA is reigniting the debate as investment advisers face uncertainties about key regulatory issues during the coming year. While the idea of a self-regulatory organization for investment advisers is not likely to gain traction in a U.S. Congress busy with major tax and spending policy issues nex t year, one thing is clear: FINRA is not backing down.

Selman stopped short of explicitly saying, "Pick us." But his prepared remarks last Thursday at a Washington conference sponsored by the Investment Program Association, a trade group, came close.

The rhetoric agitated the head of one key industry group for advisers. "I think the SEC can - and should - do a better job, but we certainly don't want to be regulated or inspected by a group like FINRA," said David Tittsworth, executive director of the Investment Adviser Association, a trade group representing more than 500 investment advisory firms.

Among his concerns: FINRA's board meetings are not open to member brokerages and the regulator, unlike the SEC, is not accountable to Congress, Tittsworth said.

A FINRA spokeswoman declined to comment.


FINRA's Selman appeared to be trying to deflect some of the criticism that a new wave of public debate over the issue is likely to bring. A FINRA predecessor, the National Association of Securities Dealers (NASD), undertook "dramatic reforms" during the 1990s to distance itself from the brokerage industry, Selman said. Those changes, prompted by an industry-wide price-fixing scandal, inclu d ed a new independent board of governors, a majority of whom were not affiliated with the securities industry, he said.

Other comments by Selman seemed to address the ongoing concerns among investment advisers that FINRA would be a poor fit for the investment adviser industry.

The differences are significant: investment advisers must act as fiduciaries, or in their clients' best interests, while brokers need only recommend investments that are "suitable," based on factors such as risk tolerance and age.

Brokers receive commissions for each transaction, while investment advisers typically receive a fee based on a small percentage of a clients' assets under management.

Selman's remarks did not lay out specific plans for investment adviser oversight.

FINRA has spent about $4 million on lobbying since 2008, according to federal disclosure reports. Much of that has been directed to efforts to broaden FINRA's authority - namely through it becoming a self-regulatory organization for the roughly 11,000 investment advisers registered with the SEC.

FINRA currently oversees about 635,000 securities industry professionals and 4,335 firms.


Selman's remarks included one point that nearly everyone in the debate agrees upon: investment advisers are not examined frequently enough. In fact, almost 40 percent have never been examined, he said, citing SEC statistics.

"The only disagreement has been the manner in which this problem should be solved," Selman said.

Legislation introduced in the U.S. House of Representatives in April would have established a self-regulatory organization for investment advisers. Another bill would have bolstered the SEC's oversight by requiring advisers to pay so-called "user fees" for examinations.

Neither bill gained traction.

The debate is likely to continue in the coming months, but it may amount to nothing more than talk, said John Coffee, a professor at Columbia Law School and authority on securities regulation. "The House and Senate don't agree that much, so the prospect of legislation rushing through Congress strikes me as modest," he said.

Setting up a self-regulatory organization on their own could ultimately spare investment advisers the possibility of the FINRA oversight they dread, Coffee said.

"An SRO will eventually come. I don't think you can sit there and say 'never, never, never,'" said Coffee.

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Comments (1)
Loden1111 wrote:
I have experienced FINRA and as the managing member of a fiduciary, SEC registered investment adviser, I don’t want them anywhere near me or my clients or our firm. FINRA obsessed over type size of its name in fine-print disclosures while missing Madoff’s Ponzi scheme. FINRA has allowed broker-dealer salespersons to call themselves “Financial Advisors,” so as to make members of the public believe that a salesperson for a securities firm is acting in their best interest. FINRA requires that a representative have empty files with exactly the right labels on them, at the same time as those same representatives were selling high-commission, high-risk, untraded securities to the public with no effective disclosure. Generating tons of paper forms does not protect the public. FINRA has the right, and I would argue, the duty to inspect the multitude of investment advisers who are dually registered as representatives of both the broker-dealer as salespersons and at the same time as an investment adviser representative of the same firm, charging fees to provide what is supposedly independent, fiduciary investment advice. Instead they focus on having all jots and tittles of the sales paperwork filled out in triplicate with every detail exactly right.

FINRA makes big money and pays its executives big money. FINRA is owned by the broker-dealers who really wish those pesky fiduciary investment advisers would just go away. Since the broker-dealers cannot compete with people who sincerely want to act in their clients’ best interests, their strategy is to regulate them out of existence. As for the “40%” of investment advisers who have never been examined, the removal of the majority of investment advisers to state jurisdiction has already solved most of that problem. I don’t mind having an SRO, but not FINRA.

Nov 27, 2012 3:27pm EST  --  Report as abuse
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