Finra, planners slug it out over adviser SRO cost

Regulator pegs annual cost at $155M, adviser groups put price at $610M; either way, Barney Frank hates the whole idea

Proponents of legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to a self-regulatory organization say that the bill has bipartisan support.

Maybe so. But the top Democrat on the House Financial Services Committee will not sign on because he questions whether the financial industry should police itself. “I’m opposed to it,” Rep. Barney Frank, D-Mass., ranking member of the panel, said in an interview with InvestmentNews. “This notion of self-regulation is inherently dubious.”

Studies on the cost of self-regulation also have been called into question. Finra released a one-and-a-half-page document Wednesday that estimated the startup cost for an SRO at about $15 million, with the annual cost topping out at $155 million.

Those numbers differ sharply, however, with a Boston Consulting Group study released last December. That report pegged the upper end of an SRO startup at $255 million and the annual cost at $610 million.

The BCG evaluation was sponsored by the Financial Planning Coalition, which is comprised of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors, and the Investment Adviser Association and TD Ameritrade. Those groups have been lobbying to keep registered investment advisers under the regulatory aegis of the Securities and Exchange Commission.

The Financial Industry Regulatory Authority Inc. contends the BCG calculations are flawed.

“The BCG [study] was a political document to make their clients happy,” said Howard Schloss, Finra’s executive vice president for corporate communications. “The methodology they used was non-sensical. The numbers they put out were wildly inflated.”

The Financial Planning Coalition shot back, saying that the Finra cost estimate “lacks any analysis, backup assumptions or data” and “uses very different assumptions regarding examiner productivity and cost per examiner than their current, publicly available data show.”

The group said that the Finra document pales in comparison to the 38-page BCG report.

“Finra’s analysis raises concerns about the independence of this oversight infrastructure it says it can put in place, and the ability of the infrastructure to meet the unique needs of investment advisers,” said Marilyn Mohrman-Gillis, managing director of communications and public policy for the CFP Board.

Mr. Schloss insists that Finra’s numbers are accurate.

“We understand what it takes to run a national exam program,” Mr. Schloss said. “We have a lot of important pieces in place. You don’t have to start from scratch.”

On Wednesday, House Financial Services Committee Chairman Spencer Bachus, R-Ala., and Rep. Carolyn McCarthy, D-N.Y., unveiled a bill that would authorize the creation of one or more self-regulatory organizations, called National Investment Adviser Associations, that would report to the SEC. All advisers with retail clients would have to belong to one of the associations and pay membership dues.

Mr. Frank said that Republicans are conceding that advisers will have to pay for increased examinations. “The question is, who should levy the fees,” he said. “Let the SEC do that.”

Mr. Frank’s opposition to the measure undercuts what the bill’s backers said is one of its chief political attributes — the bipartisan support reflected in Ms. McCarthy’s imprimatur. “Ms. McCarthy has influence,” said Dale Brown, chief executive of the Financial Services Institute Inc. “She is a credible voice on the Democratic side of the aisle. I’m encouraged by the position we’re in here.”

Mr. Frank said he isn’t sure how many of his Democratic colleagues will back the bill. “We’re not monolithic,” he said. “People have their own positions.”

The bill likely will get through the committee and may even be approved by the Republican-controlled House. But prospects are dim in the Senate, where the Democratic majority has not expressed interest in the SRO issue.

Proponents of Mr. Bachus’ bill argued that an SRO would increase adviser examinations by augmenting an underfunded SEC. A statement accompanying the bill’s release noted that only 8% of investment advisers were examined by the SEC in 2011, compared to 58% of broker-dealers, who are overseen by Finra.

Opponents said it would foist an additional regulatory burden on advisers, increase their costs and make them accountable to an organization that lacks expertise in administering the fiduciary-duty principle to which they adhere.

The specter of an SRO — especially if the job were given to Finra — has alarmed investment advisers ever since the passage of the Dodd-Frank Act, which mandated that the SEC conduct a study of ways to tighten oversight of the RIA side of the industry.

The report recommended three ways to increase adviser examinations — establish an SRO, enable the SEC to charge user fees for exams or extend Finra’s reach to include advisers who are dually registered as brokers.

Each option would require congressional authorization. Mr. Bachus’ bill is the first step in the process.

“The lack of oversight, particularly in the aftermath of the Madoff scandal, is perilous and risky,” Mr. Bachus said at a committee hearing on Wednesday. His bill “will dramatically increase the examination rate for investment advisers with retail clients.”

Brian Hamburger, managing director of MarketCounsel, a business and regulatory compliance firm, argued that regulations the bill would impose on advisers would reduce the number of brokers who break away from their firms to become RIAs.

“By stemming that tide, we’re directly impacting the ability of consumers to seek advice that is largely free from conflicts,” he said.