An SRO for advisers that could give Finra ‘a run for its money’

Washington and New York will be joined by Oxford, Miss., as centers of the investment adviser universe if a group of students from the University of Mississippi law school succeeds in establishing a self-regulatory organization for advisers

Washington and New York will be joined by Oxford, Miss., as centers of the investment adviser universe if a group of students from the University of Mississippi law school succeeds in establishing a self-regulatory organization for advisers.

The students are creating the “Self-Regulatory Organization for Independent Investment Advisers” and are launching it under the auspices of the Business Law Society, a national group that helps law students define and execute projects aimed at improving the efficiency of business law and compliance.

The project is intended to address concerns that the Securities and Exchange Commission lacks the resources to conduct investment adviser examinations. Last year, the SEC reviewed 9% of the 11,000 advisers registered with the agency.

An SEC report, mandated by the Dodd-Frank financial reform law, said an adviser SRO is one option for Congress to consider to strengthen adviser oversight. Other recommendations included authorizing the SEC to impose user fees on advisers to bolster enforcement efforts or allowing the Financial Industry Regulatory Authority Inc. to extend its oversight to include advisers dually registered as broker-dealers.

Most of the adviser community is stridently opposed to giving Finra, the SRO for broker-dealers, a role in adviser regulation, because it specializes in enforcing the rules-based suitability standard. Advisers operate under the more stringent principles-based fiduciary standard, which requires that any action that they take be in a client’s best interests.

The Mississippi students are jumping in with their own version of an SRO to pre-empt Finra from being designated as the adviser overseer, if one is authorized by Congress.

“We can’t see the Statute of Liberty from here, but we can give Finra a run for its money,” Mercer Bullard, a securities law professor at the University of Mississippi and founder of the Business Law Society, said last Wednesday.

Finra has suggested that it is best situated to handle adviser examinations. Indeed, it can argue to Congress that it has been an SRO for seven decades and offers a national reach, deep technological infrastructure and hundreds of millions of dollars in its budget.

Extending Finra’s reach to investment advisers would “close the regulatory gap” between advisers and brokers, said Dale Brown, president and chief executive of the Financial Services Institute.

“Finra has experience in performing regulatory examinations of financial service providers and has experience operating an SRO whose structure is designed to ensure its governing body, committees and staff act in the public’s best interest,” he said in a statement.

Finra itself appeared pleased by the law students’ plan.

“We welcome the recognition by professor Bullard that SROs can and should play a critical role in the oversight of investment advisers,” Finra spokeswoman Nancy Condon wrote in an e-mail. “Finra has always believed that authorization of one or more qualified SROs to augment the SEC’s oversight of investment advisers would provide critical investor protection to customers of advisers.”

The students acknowledge that they face substantial obstacles in setting up an SRO, including raising what likely will have to be millions of dollars.

“Our resources are our biggest hurdle,” said D. Tyler Roberts, a Mississippi student and member of the Business Law Society.

Nonetheless, the students are committed to establishing an SRO that will enforce the fiduciary standard, inspect 100% of its members each year and provide what they call “small-touch, tailored interactions” focused on compliance assistance rather than “deficiency-based evaluations.”

The students said that they are reaching out to advisers and others with experience in the investment advice sector to ensure that their organization has the appropriate expertise.

“We’ll have people involved on the board and elsewhere who know the industry and are advisers,” Mr. Roberts said.

The students soon will start a nationwide survey of advisers to find out what they want to see in an SRO.

It is necessary to start the process of establishing an SRO in order to provide an example of the governance, examination and financial structure that the task requires, Mr. Bullard said.

“What [the students are] doing is creating social capital,” he said.

Mr. Bullard chided groups such as the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the Investment Adviser Association for not yet coming forward with their own SRO plans.

“If the CFP, FPA or IAA gets their act together, they might want to join us,” he said.

“No one’s filling this space. If they’re serious about having an alternative, they’re getting way behind the curve.”

Leaders of the organizations called out by him said that they admire what the students are attempting to do.

“Putting together an SRO is a pretty daunting task,” said David Tittsworth, executive director of the IAA.

“We’re still trying to gather some cost data, trying to figure out how you would finance this,” he said. “There are other people doing the same thing, including Finra.”

Mr. Tittsworth is more hopeful than Mr. Bullard that an SRO can be avoided.

“The debate about investment adviser examinations is going to continue for a while,” Mr. Tittsworth said. “We’re not Pollyannaish about the likelihood that the SEC will get some kind of significant increase in funding in the near term, but I don’t think that user fees or some other options are completely out of the question.”

Marilyn Mohrman-Gillis, managing director of public policy and communications at the CFP Board, said that her group is taking a hard look at all the options in the SEC study.

“Mercer has a novel and creative idea of making [an SRO] a law school project,” she said. “It will be interesting to see what they come up with.”

Dan Barry, managing director of government relations and public policy at the FPA, concurs that the students’ idea is “interesting.”

“FPA doesn’t think that an SRO for advisers is needed,” he wrote in an e-mail. “The SEC and states have decades of experience overseeing advisers and their responsibilities shouldn’t be outsourced.”

E-mail Mark Schoeff Jr. at [email protected].