NAIFA backs Finra for adviser SRO

Insurance org weighs in for the first time on hot-button issue

Jul 29, 2011 @ 1:17 pm

By Mark Schoeff Jr.

Lobbying in favor of a self-regulatory organization for investment advisers has gained momentum, with a major insurance organization calling on Congress to authorize Finra the to do the job.

Yesterday, the National Association of Insurance and Financial Advisors announced that its board had voted unanimously to recommend the Financial Industry Regulatory Authority Inc. as the adviser SRO. Finra currently regulates broker-dealers and reports to the Securities and Exchange Commission.

Until now, NAIFA has not gotten involved in the SRO issue. But as it reviewed a LIMRA International report late last year about the organization, it realized that the majority of its 50,000 members fall under Finra's aegis — 27% are investment adviser representatives and 63% are registered representatives for broker dealers.

NAIFA asserts that tapping Finra as the adviser SRO would be the “most efficient, cost-effective answer” to increasing oversight of investment advisers.

“Finra is the best choice, especially for our members, who for the most part are already subject to Finra regulation,” said Jill Hoffman, NAIFA's assistant vice president for federal government relations.

A decision on an SRO is up to Congress. An SEC report mandated by the Dodd-Frank financial reform law and delivered in January recommended three options for bolstering adviser examinations: allow the SEC to charge user fees, establish an SRO or allow Finra to examine dually registered advisers.

The report cited a lack of SEC resources for adviser oversight. The agency last year examined only 9% of the 11,800 registered investment advisers. It also stated that one-third of advisers have never been examined.

“There is a gap in consumer protection,” Ms. Hoffman said. “Nobody really disputes this fact.”

But there is sharp disagreement over whether an SRO is necessary. Most advisers resist an SRO — and they are adamantly opposed to Finra's becoming the SRO.

They question whether the organization has the ability to enforce a principles-based fiduciary duty when its experience has been with the rules-based suitability standard. Finra maintains that it would develop a separate regulatory regime for advisers that is sensitive to industry characteristics and is shaped with the input of advisers.

SRO opponents advocate the user-fee approach because they want the SEC to maintain its oversight of advisers.

They were dealt a setback recently when the Consumer Federation of America announced that it would support an SRO over the status quo. But the group stressed that it still prefers bolstering SEC resources so that it can keep adviser work under its roof.

“I don’t see this as a seismic shift in the CFA position,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc., a leading proponent of bolstering the SEC. “We don’t feel like we’ve lost an ally at all. They made it clear that they believe SEC oversight with adequate funding is the best solution.”

Congress, however, is not showing any inclination to provide the SEC the resources it says it needs to implement Dodd-Frank and perform its core duties. The House Appropriations Committee passed a bill in June that would freeze the SEC's budget at $1.18 billion, which is $222 million less than the Obama administration's request for fiscal year 2012.

Ms. Hoffman said that it's too early to gauge congressional sentiment on the SRO issue.

“At this point, it's about educating members of Congress,” she said of NAIFA's lobbying efforts.

The topic may come up at an Aug. 4 hearing of the House Financial Services Committee on SEC reform. The panel will focus in part on a study by The Boston Consulting Group, also mandated by Dodd-Frank, that recommends that the agency improve its oversight and coordination of SROs such as Finra.

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