Is Finra pulling its efforts
to be the SRO for advisers?

Despite its denials, some believe the regulator still wants to play that role

Apr 13, 2014 @ 12:01 am

By Mark Schoeff Jr.

sro, regulator, finra, financial industry regulatory authority inc., richard g. ketchum, sec, securities and exchange commission, advisers, brokers
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Finra chief executive Richard G. Ketchum

Call it the question that won't go away.

Is the Financial Industry Regulatory Authority Inc. pursuing a campaign, either directly or indirectly, to become the self-regulatory organization for registered investment advisers?

Nearly two years ago, Finra made a strong effort on Capitol Hill to promote legislation that would shift regulation of investment advisers to a self-regulatory organization from the Securities and Exchange Commission. It was no secret that Finra wanted to become that SRO.

Since the bill died at the end of 2012, Finra has repeatedly maintained that it is no longer trying to expand its reach from brokers to investment advisers.

Last Friday, Finra chairman and chief executive Richard G. Ketchum was more emphatic, suggesting that the regulator had finally given up.

“I cannot foresee a time when Finra is going to pursue this,” Mr. Ketchum said in an interview.

He said that a gap in regulatory coverage exists for investment advisers but that Finra won't be the one to fill it.

“That's not to say, if it was posed that the right thing to do was to have somebody do a private regulation, that we wouldn't consider it,” Mr. Ketchum said.

“What we're really interested in right now is the SEC getting more resources,” he said. “We don't foresee a time when there's a response that involves an SRO.”

(Don't miss: Investment adviser lobbyist: Finra will renew effort to become adviser SRO)

In the past, such assurances haven't been enough to soothe investment advisers who are suspicious of Finra's intentions and don't want it to become their SRO.

They say that such oversight would increase regulatory burdens and compliance fees.

More importantly, they contend, Finra's rules-based regulation is anathema to the fiduciary-duty standard that advisers must meet.

Neil Simon, vice president of government relations at the Investment Adviser Association, said that he is pleased that Finra supports increased SEC funding.

But he isn't convinced that it has abandoned its adviser SRO effort completely.

“If an opportunity presents itself, even if not initiated by Finra, I suspect they would seek to gain authority over advisers,” Mr. Simon said. “I think Finra views advisers as both a regulatory and revenue opportunity.”

More from Market Counsel chief executive Brian Hamburger on what's behind Finra's latest move

If Finra were to assume adviser oversight, the regulatory fees would bolster its budget and give it wider scope at a time when the brokerage industry is shrinking. Finra suffered an $89.2 million operating loss in 2012 but scratched out a $10.5 million profit thanks to fee increases.

In 2012, a bill was introduced in the House Financial Services Committee by its then-chairman, Spencer Bachus, R-Ala., that would establish one or more SROs for advisers.

He asserted that such a change was crucial for investor protection because, as the SEC acknowledged, it had the resources to examine annually less than 10% of the nearly 11,000 registered advisers. But Mr. Bachus couldn't get a vote on the bill in his own committee.


In this Congress, which began in January 2013, the House financial panel is headed by Rep. Jeb Hensarling, R-Texas, who has shown no interest in an SRO bill.

But lawmakers also have denied the SEC the budget increases that it says it needs for adviser oversight, keeping the SRO option in play.

Even though Finra halted its lobbying effort, it has made moves since the demise of the bill that would help position it to become the investment adviser regulator.

For instance, Mr. Ketchum has been stressing to brokerage firms to act in the best interests of their clients, which sounds a lot like the fiduciary standard. Legally, brokers need only meet a suitability standard for giving investment advice.

(See also: Finra advisory group could accelerate regulator's move toward 'best-interests' regime)

The theme was implicit in a conflicts-of-interest report that Finra released last fall.

Also, Finra has put an examination emphasis on 401(k) rollovers to individual retirement accounts and other areas normally under the purview of adviser regulators.

Finra has mimicked the SEC in other ways. For instance, it has established a cost-benefit-analysis office to evaluate the economic impact of its rules — a move that is likely to please Republican lawmakers, who have hammered the SEC on the topic.

Also, like the SEC, Finra has established an investor issues committee to amplify the voice of retail investors within the organization.

In recent months, Finra also has been particularly responsive to Congress. It responded to criticism from senators of both parties about the process by which brokers can sanitize their records on the Finra database BrokerCheck.

Finra promised Sen. Charles Grassley, R-Iowa, and Sen. Jack Reed, D-R.I., that it would propose a rule prohibiting arbitration settlements made contingent on expungement.

Mr. Ketchum argues that these moves simply make Finra a better broker regulator.

“Each of them, I think, goes at our twin goals of trying to be an aggressive, investor-focused regulator who's well-informed and understands the industry,” he said.

Regulatory experts and investment adviser advocates take Finra at its word that it isn't lobbying to become the adviser SRO.

But they say that Finra is incrementally strengthening its argument.

“Finra is slowly addressing one criticism after another of the way they operate,” said a state regulator, who asked not be identified. “The long-term plan for Finra is to offer itself as an outsourcing option to government regulation.”

The Financial Services Institute Inc., which represents independent broker-dealers, is working with Finra on what it calls a “Finra improvements” initiative that addresses several areas — from cost-benefit analysis to exams and arbitration.


FSI chief executive Dale Brown credited Mr. Ketchum with being open to outside input.

Mr. Brown also said that Finra's evolution could bolster its chances of one day regulating advisers.

“That possibility is out there,” he said.

“I'm not sure they've changed the long-term view that that's a role they would like to take on,” Mr. Brown said. “Those moves also make it more nimble and responsive, and hopefully a more effective regulator.”

A former Finra official said that these moves don't necessarily indicate that it is angling to become the adviser regulator.

“My gut tells me it's not a concerted effort,” said George Friedman, owner of an eponymous consulting firm and former director of arbitration at Finra. “These are things that have come in the natural course of Finra's investor protection mission.”

But Mr. Friedman agrees that addressing the shortcomings cited by detractors can only help Finra if it seeks to become the adviser regulator down the road.

“If critics could point to a litany of problems that have not been solved, that could be a major concern,” he said.

Investor advocates embrace Finra's effort to address those criticisms, regardless of whether it is pursuing a larger political gain.

“If their goal is to become the adviser SRO by being responsive to investors and critics who raise legitimate issues, that works for me. It's a lot better than competing to be the SRO by doing whatever the industry wants,” said Barbara Roper, director of investor protection at the Consumer Federation of America and a member of Finra's Investor Issues Committee.

“I don't care about motivation,” she said. “I care about how they approach investor protection issues.”

In any case, the political atmosphere for an adviser SRO bill may not become more favorable for Finra for a while, according to Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary-duty training company.

“The only way I could see that happening is if there's another huge Madoff-type scandal that galvanizes Congress to do something,” he said.


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