Finra's cease-fire on RIA oversight

Regulator is indicating that legislation on SRO proposal might not be revived this year

Feb 10, 2013 @ 12:01 am

By Mark Schoeff Jr.

The brokerage industry's self-regulatory organization hasn't 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 last Thursday.

Finra, which has positioned itself as the best choice to fill the SRO role, is not giving up, he said.

Backers argue that an SRO would strengthen investor protection because it has the res-ources 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],” Mr. Ketchum said.

“If an SRO is not approved, the SEC should be given more resources to oversee [advisers],” he said. “Any way you look at it, the SEC needs more resources to address a significant investor exposure.”

A 2011 SEC study mandated by the Dodd-Frank financial reform law indicated that the commission 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 past 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 an SRO champion.

Mr. Bachus, who has given up the chairmanship of the Financial Services Committee, hasn't reintroduced the bill. The new chairman, Rep. Jeb Hensarling, R-Texas, hasn't indicated any interest in an SRO bill.

Neither Mr. Bachus nor Mr. Hensarling was available for comment.

FIERCE OPPOSITION

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. She hasn't reintroduced her bill.

Finra's cease-fire doesn't mean that the war is over, observers said.

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

NOT THE END?

Dave O'Brien, owner of O'Brien Financial Planning Inc., agrees.

“This is good news, but it's not the final chapter,” he said. “Not for a minute do I think this is the end of the story.”

Finra may be rethinking its legislative priorities but probably isn't abandoning the SRO idea, said Neil Simon, the Investment Adviser Association's vice president for government relations.

“It is essential that advisers remain vigilant,” he said. “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.

mschoeff@investmentnews.com Twittr: @markschoeff

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