Groups cheer push to contain Finra's reach

Rep. Frank pledges to defeat the controversial amendment

Nov 8, 2009 @ 12:01 am

By Sara Hansard

Investment advisory groups, state regulators and consumer advocates last week cheered a pledge by the House Financial Services Committee's chairman to defeat a measure that could expand Finra's reach over advisers.

“We could not be happier,” Texas Securities Commissioner Denise Voigt Crawford said of Rep. Barney Frank's plans to oppose an amendment to the proposed Investor Protection Act that would give the SEC the authority to put Finra in charge of a quarter of all federally registered investment advisory firms.

Ms. Voigt is president of the North American Securities Administrators Association Inc.

The amendment, which was sponsored by the ranking Republican member of the committee, Rep. Spencer Bachus, R-Ala., was contained in the bill approved last Wednesday by 41-28 vote of the committee.

It was included over the objections of Mr. Frank, who declared he would fight to remove the amendment from the bill when it goes to the full House next month as part of a broader package of proposed legislation aimed at bringing about financial reform. Mr. Frank, a Massachusetts Democrat, is chairman of the committee. “We're very pleased with Chairman Frank's decision to basically reverse that amendment,” Financial Planning Association chief executive Marvin Tuttle said. “That will mean that we still have the opportunity to see financial advisers properly regulated under an appropriate regulatory scheme.” The FPA, and other adviser groups, strongly oppose the Bachus amendment on the grounds that the Financial Industry Regulatory Authority Inc's expertise is with brokers, not investment advisers. They fear Finra would weaken existing fiduciary standards governing financial professionals who provide personal advice to clients. Barbara Roper, director of investor protection for the Consumer Federation of America, also came out in favor of Mr. Frank's decision to try to strip the Bachus amendment from the legislation. “The Bachus amendment is a radical change in regulatory ap-proach that we oppose,” she said. Finra declined to comment on the results of the vote. Beforehand, however, the self-regulatory organization expressed its support for the Bachus amendment. The amendment would allow Finra “to put more boots on the ground,” Finra spokeswoman Nancy Condon wrote in an e-mail earlier in the week. “It is disappointing, but not surprising, that industry groups oppose more-frequent examination of their firms,” she wrote. “It is obvious that these industry groups would like to keep it that way.” The Securities and Exchange Commission this year expects to examine only 9% of the investment advisory firms it regulates, Ms. Condon noted, while Finra inspects 55% of the brokerage firms it regulates. Although opponents of the amendment were pleased by Mr. Frank's decision to oppose it, obstacles still remain, said David Tittsworth, executive director of the Investment Adviser Association. For starters, the full House will be dealing with many high-profile rule proposals in the legislation package, including the formation of a Consumer Financial Protection Agency, systemic-risk regulations and restrictions related to executive compensation. The Bachus amendment, said Mr. Titts-worth, could easily get lost in the crowd. Second, it remains to be seen whether other legislators are in favor of removing the amendment, he added. “The investment adviser community needs to get politically active and let their members of Congress know where they stand on this issue,” said Mr. Tittsworth. If passed, the Bachus amendment could give Finra the authority to regulate the investment advisory businesses of dually registered firms, as well as investment advisory firms and representatives that are associated with brokerage firms. In total, that could cover about 25% of all federally registered advisory firms — a group that in aggregate manages nearly 80% of investment advisory assets — as well as 88% of all investment adviser representatives who are dually registered as representatives of broker-dealer firms, according to an analysis done by the amendment's opponents. Giving Finra authority over advisers would weaken fiduciary standards that advisers are required to abide by, according to critics. “For years, Finra and its predecessor organization, NASD Regulation, have sided with brokers in opposing efforts to hold brokers to a fiduciary standard when they provide investment advice,” according to a letter sent last week to leaders of the Financial Services Committee by the FPA, CFA Institute, the IAA, the National Association of Personal Financial Advisors, the Certified Financial Planner Board of Standards Inc. and, which is a group of long-term investors that includes unions and shareholder activists. Under the amendment, “Finra could become the main arbiter of how the fiduciary duty is applied to conduct by brokers, SEC-registered advisers with broker-dealer affiliates, and most financial planners,” the letter said.


The Financial Services Institute Inc., which represents 115 brokerage firms — most of which are dually registered as investment advisory firms — also voiced its opposition to the Bachus amendment.

“We have significant concerns with this proposal,” said David Bellaire, the FSI's general counsel and director of government affairs. “They have increased the regulatory burden on [dually registered] firms, where the supervision was already quite substantial, and they've done nothing to address the real regulatory gap that exists over investment advisory firms.”

The FSI supports having an SRO for investment advisory firms, but it has not come out in favor of having Finra in that role.


Even as advisory groups push to prevent Finra from regulating their industry, some brokers say Finra regulation makes sense for firms that are either dually registered or associated with brokerage firms.

“Finra already audits my broker-dealer,” said Paul Mendelsohn, president of Windham Financial Services Inc., a dually registered firm that manages about $28.7 million “I would just as soon have one regulator to deal with, as opposed to having Finra audit my broker-dealer and the SEC audit my registered investment advisory side.”

Finra should be able to regulate individuals associated with brokerage firms “to the full extent of Finra regulations,” said Jim Dowd, president of fee-only advisory firm North Capital Inc., which manages about $10 million.

If Finra had control over all financial professionals at broker-dealers and associated firms, the SRO would have been better able to ensure that representatives followed appropriate regulations, he said. “It clarifies the regulatory lines.”

E-mail Sara Hansard at


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