Law students’ SRO aims to ‘give Finra a run for its money’

Oxford, Miss., would join Washington and New York as centers of the investment adviser universe — if a group of students from the University of Mississippi law school succeeds in establishing a self-regulatory organization for advisers.

The students are seeking to create the Self-Regulatory Organization for Independent Investment Advisers. The effort is being launched under the auspices of the Business Law Society, which helps law students define and execute projects.

The SRO was launched in response to concerns that the Securities and Exchange Commission lacks the resources to conduct investment advisers examinations. Last year, the SEC reviewed 9% of the 11,000 advisers registered with the agency.

An SEC report, mandated by the Dodd Frank financial reform law, recommends an adviser SRO as one option for Congress to consider to strengthen adviser oversight. Other recommendations included authorizing the SEC to impose user fees on advisers to bolster enforcement efforts or allowing the Financial Industry Regulatory Inc. to extend its oversight to include advisers dually registered as broker dealers.

Most of the adviser community is stridently opposed to Finra, the SRO for broker dealers, having a role in adviser regulation because it specializes in enforcing the rules-based suitability standard. Advisers operate under the more stringent fiduciary duty, which requires that they offer advice that is in a client’s best interest.

The Mississippi students are jumping in with their own SRO to pre-empt Finra from being designated as the adviser overseer, if Congress indeed authorizes an SRO.

“We can’t see the Statute of Liberty from here, but we can give Finra a run for its money,” Mercer Bullard, a securities law professor at the University of Mississippi and founder of the Business Law Society, told reporters on a conference call on Wednesday.

Finra has hinted that it is best situated to handle adviser examinations. Indeed, it can argue to Congress that it has been an SRO for seven decades and offers a national reach, deep technological infrastructure and hundreds of millions of dollars in its budget.

Dale Brown, president and chief executive of the Financial Services Institute, said that extending Finra’s reach to investment advisers would “close the regulatory gap” between advisers and brokers, who he said are subject to much more vigorous oversight by Finra than advises are by the SEC.

“Finra has experience in performing regulatory examinations of financial service providers and has experience operating an SRO whose structure is designed to ensure its governing body, committees and staff act in the public’s best interest,” Mr. Brown said in a statement.

Finra itself appeared pleased by the law students’ plan. “We welcome the recognition by Professor Bullard that SROs can and should play a critical role in the oversight of investment advisers,” Finra spokeswoman Nancy Condon wrote in an e-mail. “Finra has always believed that authorization of one or more qualified SROs to augment the SEC’s oversight of investment advisers would provide critical investor protection to customers of advisers.”

The students themselves acknowledge they face sizeable obstacles in setting up and running an SRO, including raising what will likely be the millions of dollars.

“Our resources are our biggest hurdle,” said D. Tyler Roberts, a Mississippi student and member of the Business Law Society.

Nonetheless, the students are committed to offering an SRO that will enforce the fiduciary standard, inspect 100% of its members each year and provide what they call “small-touch, tailored interactions” focused on compliance assistance rather than “deficiency-based evaluations.”

The students say that they are reaching out to advisers and others with experience in the investment advice sector to ensure that the SRO has the appropriate expertise.

“We’ll have people involved on the board and elsewhere who know the industry and are advisers,” Mr. Roberts said.

The students will soon launch a nationwide survey of advisers to determine what they want to see in an SRO.

Mr. Bullard said that it’s necessary to start the process of establishing an SRO in order to provide an example of the governance, examination and financial structure the task requires.

“What (the students are) doing is creating social capital,” Mr. Bullard said.

He chided groups like the Certified Financial Planner Board of Standards Inc., the Investment Adviser Association and the Financial Planning Association for not yet coming forward with their own SRO plan.

“If the CFP, FPA or IAA gets their act together, they might want to join us,” Mr. Bullard said. “No one’s filling this space. If they’re serious about having an alternative, they’re getting way behind the curve.”

Leaders of the organizations called out by Mr. Bullard each say that they admire what the students are attempting to do.

“Putting together an SRO is a pretty daunting task,” said David Tittsworth, executive director of the Investment Adviser Association. “We’re still trying to gather some cost data, trying to figure out how you would finance this. There are other people doing the same thing, including Finra.”

Mr. Tittsworth is more hopeful than Mr. Bullard that an SRO can be avoided.

“The debate about investment adviser examinations is going to continue for a while,” Mr. Tittsworth said. “We’re not Pollyanaish about the likelihood of the SEC getting some kind of significant increase in funding in the near term. But I don’t think that user fees or some other options are completely out of the question.”

Marilyn Morhrman-Gillis, managing director of public policy and communications at the CFP Board, said that her organization is carefully exploring all of the options in the SEC study.

“Mercer has a novel and creative idea of making (an SRO) a law school project,” Ms. Mohrman-Gillis said. “It will be interesting to see what they come up with.”

Related Topics: Financial Industry Regulatory Authority