SRO battle intensifies; will independents have a separate regulator?

Sep 18, 2011 @ 12:01 am

By Liz Skinner

The latest scrum over how to boost oversight of financial advisers suggests that independent advisers may have to accept an entirely new self-regulator if they want to avoid coming under Finra's jurisdiction.

Draft legislation proposed by House Financial Services Committee Chairman Spencer Bachus, R-Ala., would allow for one or more groups to act as adviser self-regulatory organizations.

A subcommittee discussion last Tuesday raised the idea of Finra's overseeing those registered both as investment advisers and broker-dealers, and having a separate SRO for firms registered only as investment advisers.

Advisers opposed to having the Financial Industry Regulatory Authority Inc. take over from the Securities and Exchange Commission regulatory duties such as examinations of investment advisers are not backing any SRO measure at this point. But some believe that the idea unlocks the possibility of satisfying independent investment advisers and still giving broker-dealers what they want — to boost advisers' compliance burden to match their own. (Also see: IN Editorial: Two SROs may be better than one)


“If anyone is on a sinking boat, they are going to look for a life ring,” said Duane Thompson, senior policy analyst for Fi360 LP. “Certainly, having more than one SRO could be an opportunity for investment advisers to examine as an alternative to Finra.”

The SEC laid the groundwork for this compromise in a January report, required by the Dodd-Frank Act, which directed the commission to assess how to strengthen adviser oversight. In that report, the SEC acknowledged that it examines only about 9% of advisers each year because it lacks the resources to probe more.

The report gave Congress three options.

The first would require advisers to pay user fees that would fund more examinations. Despite the SEC staff's extolling the benefits of user fees in the report, lawmakers at the congressional hearing didn't give the idea serious consideration. And the SEC wasn't there to make its case.

Instead, the discussion since has focused on Mr. Bachus' draft bill, which has the potential to blend the two other SEC options into one solution. The SEC report suggested designating one or more SROs to oversee advisers or giving Finra the power to examine dually registered firms.

Finra chief executive Richard Ketchum testified that if the organization were to become an SRO for investment advisers, it would “implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business.”

He also said the group would be willing to take on enhanced oversight responsibilities from the SEC if it were tapped to regulate investment advisers. Finra currently oversees broker-dealers.


The tone of the hearing of the Financial Services Capital Markets subcommittee — at which pro-SRO witnesses were in the majority — caused some people to conclude Finra may be selected, at least for dually registered advisers, and perhaps for all retail advisers.

“We are starting to believe that Finra will become the new retail-adviser SRO,” said compliance attorney Todd Cipperman.

While Mr. Bachus' bill would allow for more than one SRO, that idea may be contrary to what lawmakers are looking for in terms of consistency of oversight, he said.

Others agree that the legislative language may not be what it appears.

“Just because it allows for more than one national investment adviser association ... doesn't mean you're going to get more than one,” said David Tittsworth, executive director of the Investment Adviser Association.

He pointed out that the legislation that created Finra's predecessor organization, NASD — which Mr. Bachus has said is the model for the draft bill under discussion — also allowed for more than one SRO for broker-dealers, but only one exists.

The IAA has considered different scenarios under which it could become an SRO. The cost — hundreds of millions of dollars — would be the first hurdle in creating a national SRO, he said. Another consideration is which advisers to cover.

“And you'll be competing with Finra,” Mr. Tittsworth said.

Of course, Congress wouldn't specifically mandate any particular SRO, and Mr. Bachus' bill does not. It just leaves the door open for more than one, though that could change in later drafts. The measure, called the Investment Advisers Oversight Act of 2011, hasn't been filed.

The IAA and the Financial Planning Coalition, made up of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors, support giving the SEC the resources it needs to boost oversight.

Mr. Tittsworth admitted, however, that the partisan atmosphere on Capitol Hill and the dissatisfaction that Republicans have expressed about the SEC make it clear “they won't be pouring a bunch of money into the SEC coffers.”

Barbara Roper, director of investor protection at the Consumer Federation of America, said multiple SROs could become problematic, with possible inconsistencies be-tween rules. It also could boost the burden on the SEC, which would have to oversee multiple SROs.

But she said it could work.

“There is a lot of diversity in the business model, so if they want that freedom to do something differently, then you just have to make sure everybody is doing a good job,” Ms. Roper said.

The CFA is familiar with compromise. In July, the consumer rights group dropped its opposition to an SRO after giving up on the budget boost the SEC needs to increase the frequency of examinations.

Compliance consultant Zachary Gronich said Finra should not become an SRO for investment advisers.

“If you do an SRO, it needs to be a new SRO,” said Mr. Gronich, chief executive of RIA In A Box Inc. Brokers and investments advisers “look like two groups of people who are similar, but they are not,” he said.

Of course, those eager to require that investment advisers meet the same Finra rules as brokers may not be happy to see more than one SRO.

“We do indeed back Finra as the one and only SRO,” said Chris Paulitz, a spokesman for the Financial Services Institute Inc. “Even if it's in the language, the possibility is very slim that any other entity is in place to properly function as an SRO other than Finra.”

Email Liz Skinner at


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