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