Finra advisory group could accelerate regulator's move toward 'best-interests' regime

New panel will advise SRO on the impact of its rules and policies on investors

Dec 19, 2013 @ 10:49 am

By Mark Schoeff Jr.

A new Finra advisory committee could underscore the regulator's recent emphasis on having brokers act in the best interests of their clients, according to industry observers.

This week, the Financial Industry Regulatory Authority Inc. said that it is establishing the Investor Issues Committee. The panel will comprise 11 members from industry, academia and the advocacy community who will advise Finra of the potential impact of its rules and policies on retail and institutional investors.

Bringing the investor's perspective to Finra's work will add momentum to its tendency to promote the best-interests standard for investment advice, said Skip Schweiss, managing director of adviser advocacy at TD Ameritrade Institutional.

Last month at an industry conference, Finra chairman and chief executive Richard G. Ketchum called on brokers to act in the best interests of their clients, even though they are held to a less stringent standard under the law.

A recent Finra study on conflicts of interest made the same point.

“Finra seems to be moving in the direction of a more fiduciary-like regulatory regime for brokers,” Mr. Schweiss said. “[The committee] can only enhance that progress.”

Mr. Schweiss said he is “strongly encouraged” by the presence of Barbara Roper, director of investor protection at the Consumer Federation of America, on the panel.

For her part, she said that it is too early to determine what the committee's agenda will be.

But Ms. Roper intends to continue to make strengthening investment-advice standards a high priority.

“I've been working on this issue forever,” she said. “I bring it into any forum I go into.”

In recent years, Finra has pushed to become the regulator of investment advisers, who must meet a fiduciary or best-interests standard when providing advice. Investment advisers have resisted the notion, preferring oversight by the Securities and Exchange Commission.

One of the ways that the committee will help Finra is by providing input on the potential investor impact of rules as they are being formulated, according to Ms. Roper. “It helps [Finra] to get a better understanding of potential benefits to investors early in the process of the rule you're trying to adopt rather than retrofitting them on afterwards,” said Ms. Roper, who also is a member of the SEC's Investor Advisory Committee.

A former SEC chief economist, Mark Ready, is another member of the Finra committee.

He said that it is difficult to predict how much sway the panel might have on the regulator.

“My understanding is that we're a sounding board,” said Mr. Ready, a professor of finance at the University of Wisconsin School of Business and academic director of the Hawk Center for Applied Security Analysis.

“The extent to which we'll be influential is yet to be seen,” he said. “The act of creating a committee shows that Finra is at least concerned with getting input from a variety of constituents,”

But one investor advocate noted that despite a recommendation by the SEC Investor Advisory Committee for the commission to advance a uniform fiduciary duty rule on investment advice, it remains on the agency's “long-term” agenda.

“The recent experience with the SEC is a reminder that advisory groups are just that: advisory,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “The recommendations may or may not have any impact.”

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