Finra calls cease-fire on RIA oversight

Ketchum says SRO not having success convincing lawmakers to make the change

Feb 7, 2013 @ 11:06 am

By Mark Schoeff Jr.

regulation, broker-dealers, registered investment advisers, RIA, ketchum, finra, sec
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((Photo: Bloomberg News))

The brokerage industry's self-regulatory organization has not ended the battle to extend its reach to include investment advisers, but it is holding fire.

Last year, the Financial Industry Regulatory Authority Inc. advocated for legislation that would shift adviser oversight from the Securities and Exchange Commission to one or more SROs. That measure bogged down in the House Financial Services Committee – and Finra is indicating that it might not be revived this year.

“We're realistic enough to know that there doesn't appear to be any strong momentum to move forward in Congress, given other priorities,” Finra chief executive Richard G. Ketchum said in an interview with InvestmentNews.com on Thursday.

Mr. Ketchum said that Finra, which has positioned itself as the best choice to fill the SRO role, is not giving up. Backers argue that an SRO would strengthen investor protection because it would have the resources to conduct more adviser examinations than the SEC can perform annually.

“We haven't changed our view,” Mr. Ketchum said. “We've been at this for four years now. The SRO approach is the most effective, least duplicative way to oversee [advisers]. If an SRO is not approved, the SEC should be given more resources to oversee [advisers]. If an SRO is not approved, the SEC should be given more resources to address a significant investor exposure. Any way you look at it, the SEC needs more resources.”

A 2011 SEC study mandated by the Dodd-Frank financial reform law indicated that the SEC could conduct annual examinations of only 8% of the approximately 12,000 advisers under its aegis at the time. After some adjustments ushered in by Dodd-Frank, the SEC now oversees about 11,000 advisers.

Finra examines the 4,275 broker-dealers registered with it about once every two years.

Finra has spent nearly $2 million lobbying Congress over the last two years, with the SRO bill as its top issue, according to the Center for Responsive Politics.

But that muscle ran into a difficult political reality last year. Rep. Spencer Bachus, R-Ala., then chairman of the House Financial Services Committee, introduced an SRO bill that drew bipartisan skepticism and failed to make its way to a vote by the panel.

In the new Congress, there doesn't appear to be a SRO champion. Mr. Bachus, who has given up the chairmanship of the Financial Services Committee, has not reintroduced the bill. The new chairman, Rep. Jeb Hensarling, R-Texas, has not indicated any interest in an SRO bill. Neither Mr. Bachus nor Mr. Hensarling was available for comment.

Investment advisers and their lobbying organizations fiercely opposed the SRO bill last year, arguing that it was a costly new layer of regulation.

They instead backed a measure introduced by Rep. Maxine Waters, D-Calif., now ranking member of the Financial Services Committee, that would allow the SEC to charge advisers user fees for exams. Ms. Waters has not reintroduced her bill.

Observers say that Finra's ceasefire doesn't mean the war is over.

“It's good news that they're not working the bill on Capitol Hill at this time,” said Duane Thompson, senior policy advisor at Fi360 Inc., a fiduciary training company. “It doesn't mean they're going to forget about it or walk away completely.”

One investment adviser agreed.

“This is good news, but it's not the final chapter,” said Dave O'Brien, owner of O'Brien Financial Planning Inc. “Not for a minute do I think this is the end of the story.”

Neil Simon, the IAA's vice president for government relations, said that Finra may be rethinking its legislative priorities but probably is not abandoning the SRO idea.

“It is essential that advisers remain vigilant,” Mr. Simon said. “This issue is not going away. It is essential that advisers educate their members of Congress about what their concerns are.”

A Finra ally on the SRO issue, the Financial Services Institute Inc., said that it is reassessing the political situation but not giving up.

“We agree with Richard Ketchum's analysis of the legislative environment,” FSI chief executive Dale Brown said in a statement. “We plan to continue working with all involved parties to achieve the goal of effective investor protection.”

As Finra moves the SRO issue down its priority list, it will focus on other regulatory topics, such as broker-dealer conflicts, structured products and high-frequency trading.

“Job No. 1 is to be the best independent regulator we can be,” Mr. Ketchum said.

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