Finra may expand oversight to all financial advisers

Dodd-Frank law could lead to SEC handoff

Jul 18, 2010 @ 12:01 am

By Jed Horowitz

Finra, whose rules-based approach to oversight of brokers is anathema to many fee-based financial advisers, could expand its jurisdiction to all advisers as a result of the new financial-regulatory-reform legislation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act makes no specific reference to adviser oversight duties for the Financial Industry Regulatory Authority Inc., but at least two of its provisions suggest that regulators could head in that direction.

The legislation requires the Securities and Exchange Commission to study the effectiveness of the different standards of customer care governing broker-dealers and investment advisers and, if necessary, write rules harmonizing the standards. SEC Chairman Mary Schapiro has reiterated her support for imposing “a uniform fiduciary standard” on brokers and advisers when giving financial advice, and welcomed the new rulemaking authority.

But constraints on the SEC's budget and time, exacerbated by scores of studies and new responsibilities spawned by the new law, make it likely that the commission will cede oversight of the fiduciary standard to Finra, observers said, at least as it regards brokers and dually registered, or hybrid, advisers.

“Given that Finra already has rules and enforces them, I don't see how it does not play a role in oversight and enforcement of the fiduciary duty for broker-dealers,” said Kristina Fausti, director of legal and regulatory affairs at Fiduciary 360 LLC, which offers training and certification courses to advisers. “It's less clear that the SEC could delegate to them for investment advisers, though ultimately, harmonization could move it in that direction.”

Ammunition for expanding Finra's jurisdiction over all advisers lies in Section 914 of the legislation. The 205-word passage requires the SEC to evaluate the adequacy of its oversight of investment advisers, make appropriate rule revisions and recommend whether Congress should designate one or more self-regulatory organizations to bolster the SEC supervision and exam schedule.

Not all advisers are panicking over the possibility of Finra oversight, in part because nothing will change overnight. The law gives the SEC six months from the date of passage to produce the two studies, and no deadlines for writing new or revised rules. Efforts by Finra or others to get Congress to name an SRO for advisers also will likely be complicated by the midterm elections.

Finra officials, however, have signaled their desire to play a role in oversight of the fiduciary standard, and some advisers said it's a near certainty.

“I don't know that there's anyone else remotely in the position to do it,” said Harold Evensky, a longtime stalwart of the independent adviser world and president of Evensky & Katz Wealth Management. “Obviously, I would prefer the SEC, but it simply doesn't have the funding.”

SEC spokesman John Nester declined to comment.

Harvey Goldschmid, a member of Finra's board of governors since 2007 and a former SEC commissioner, said examining advisers is a natural progression for Finra.

“It will make sense to have a fiduciary standard for broker-dealers, and it makes sense for there to be a self-regulatory structure for investment advisers,” said Mr. Goldschmid, who is a professor at Columbia Law School. “The resources of a self-regulatory organization can be of enormous help to the SEC.”

Finra would have to reorganize its board to include representatives of the investment adviser community to avoid an appearance of bias, and also determine how to fund the additional staff and technology it would need, Mr. Goldschmid said. But expanding oversight to advisers “would be a relatively small jump in terms of the learning curve,” he said.

In Finra's newly published annual report, chairman and chief executive Richard Ketchum bows to the SEC as “the correct agency” to ensure the effectiveness and practicality of a fiduciary standard of care but adds a regulatory pitch. “[A] fiduciary standard of care must be accompanied by a comprehensive examination program,” he wrote. “This is especially important today when so many firms and individuals are dually registered as both broker-dealers and investment advisers or have affiliated businesses that work closely together. Both sides of those businesses must be examined on a regular basis to ensure that regulators see the full picture in order to better protect investors.”

Valerie Brown, chief executive of Cetera Financial Group, an independent broker-dealer with a large contingent of dually registered advisers, strongly endorses Finra's jurisdiction over registered investment advisers.

“If we're going to have a similar standard of care, it makes a ton of sense to harmonize regulations, supervision and inspection,” she said.

Fee-only advisers fear that Finra's rules-based approach to regulation will disrupt their business model, despite Mr. Ketchum's assertions that the organization is evolving from a “one-size-fits-all, check-the-box” regime.

“Rules aren't necessarily bad, but they change the construct of what advisers focus on and how they relate to clients,” Ms. Fausti said.

William Baldwin, chairman of the National Association of Personal Financial Advisors, which represents fee-only advisers, said he doesn't consider Finra oversight of his members to be imminent, though it could be a “logical extension” of the moves to harmonization. “We don't want to be governed by Finra,” he said.


Many fee-only advisers view harmonization as a euphemism for watering down the fiduciary standard in order to facilitate sales of commission-based products. The new law explicitly says that receipt of commissions isn't a violation of a fiduciary standard, a view endorsed by the Certified Financial Planner Board of Standards Inc.

But Robert Glovsky, chairman of the CFP Board, said that the group opposes Finra as a regulator. Concerns about the SEC's budget-constrained ability to patrol the RIA beat should be ameliorated by new fee capture mechanisms and by the impending transfer of some 4,000 smaller RIAs to their home state regulators from the SEC.

Mr. Evensky noted that it's a pointless exercise for advisers either to demonize Finra or underestimate its and the SEC's abilities and good intentions.

“They really committed to the concept that anyone offering financial advice must be held to real fiduciary principles,” he said. “Some of my friends argue that you can't legitimately sell a proprietary product, but it's just not realistic to think we're going to dismantle the whole broker-dealer structure of financial services.”

E-mail Jed Horowitz at


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