Finra champions adviser SRO – and its own suitability for the job

Finra is spending hundreds of thousands of dollars this year to lobby Congress to authorize a self-regulatory organization for investment advisers — a role that it would like to fill itself

Finra is spending hundreds of thousands of dollars this year to lobby Congress to authorize a self-regulatory organization for investment advisers — a role that it would like to fill itself.

The broker-dealer regulator won’t know for a while whether its efforts will pay off. Congress likely will hold a hearing this summer to get an initial indication of which way lawmakers are leaning on the issue of increasing oversight of investment advisers.

But the timeline for action after that — like much of the congressional agenda beyond lifting the debt ceiling — is murky.

“It’s a little too early to tell,” Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., said at its annual conference last week in Washington. “It’s a difficult political environment right now.”

But he is confident that Capitol Hill will address the issue, perhaps during this congressional session, which runs until December 2012.

SEC REPORT

The Securities and Exchange Commission delivered a report to Congress in January proposing three ways to bolster adviser oversight: allowing the SEC to charge a user fee for exams, establishing an SRO for advisers or allowing Finra to extend its reach to investment advisers who also are registered as broker-dealers. Any of the options would have to be authorized by Congress.

The report, mandated by the Dodd-Frank financial reform law, also reiterated that the SEC examines just 9% of its 11,800 registered investment advisers annually.

“Long-term, the SEC’s conclusion that they don’t have the resources to properly oversee investment advisers will result in some [congressional] action,” Mr. Ketchum said.

Meanwhile, Finra is making its case on Capitol Hill. Finra spent $300,000 lobbying Congress during the first quarter and hired former Rep. Michael Oxley, R-Ohio, to persuade his former colleagues to back an adviser SRO. He was chairman of the House Financial Services Committee.

Advisers are fiercely resisting the notion that Finra, the SRO for broker-dealers, could also oversee them.

Mr. Ketchum told reporters at the Finra conference that if the organization became the adviser SRO, it would focus primarily on examinations and enforcement rather than issuing regulations. It also would add staff members with experience in the advisory model, seek input from investment advisers about the oversight regime and include advisers on a majority-public board monitoring the advice industry.

Large broker-dealers are getting into the act when it comes to persuading lawmakers to authorize an SRO, specifically Finra. Mark Casady, chairman and chief executive of LPL Financial, told the audience at the Finra conference that the advice industry is moving to the “lowest common denominator for regulation,” which he said is the investment adviser model.

“We have an incredibly uneven playing field that is becoming more uneven every day,” he said. “We have to have an SRO for both [broker-dealers and investment advisers].

LPL is deeply involved in the issue on Capitol Hill; it’s hired a lobbying firm and set up an outreach program for its advisers to contact lawmakers.

Meanwhile, Marilyn Mohrman-Gillis, managing director for public policy and communications at the Certified Financial Planner Board of Standards Inc., is meeting with lawmakers to advocate for its position that the SEC should maintain its role as the primary adviser regulator.

To do so, it would need to charge user fees, which means that she has to convince Republicans that the fees wouldn’t be taxes.

In her meetings, Ms. Mohrman-Gillis points out that financial advisers would have to pay for more exams. The question is whether the charges would come as user fees to the SEC or fees to an SRO.

“The industry will be assessed an amount of money to increase oversight. We need to have increased oversight,” Ms. Mohrman-Gillis said.

“How are we going to pay for it? We’re trying to help policymakers parse through that initial reaction that a user fee is a tax, and that’s bad,” Ms. Mohrman-Gillis said.

Legislators likely will take some time before they reach any conclusion on an SRO.

“There are lots of other issues in Dodd-Frank that are attracting a lot more attention,” Mr. Casady said in an interview after speaking on a panel at the Finra conference. “I wouldn’t be surprised if this is a three- to four-year discussion with the Hill.”

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