In a comment letter posted to the SEC website last week, Richard Ketchum, Finra's chief executive, laid out in some detail what a self-regulatory organization for advisers might look like.
He wrote that the Securities and Exchange Commission probably isn't suited to do the job, but the
Financial Industry Regulatory Authority Inc. is.
Due to the SEC's “intractable resource problem, we recommend that the commission seek authority to establish one or more self-regulatory organizations for investment advisers,” Mr. Ketchum wrote in his letter, dated Nov. 2.
“If Finra were to seek authorization as an investment adviser SRO, we would create a separate affiliate, with its own board of governors, to ensure that the SRO establishes programs appropriate to the adviser industry,” he wrote.
An adviser SRO should be “subject to exacting requirements” to ensure that it is accountable, transparent and “free of undue industry influence,” and should have a board with a majority of public members, Mr. Ketchum wrote. Members from the adviser industry would make up a “substantial portion” of the remaining seats.
The adviser SRO should also have an independent staff and an enforcement department like Finra has now, Mr. Ketchum wrote.
The new private regulator for advisers should be given “some rulemaking authority,” the extent of which would be determined by the SEC, he wrote in the letter. It should have authority to enforce its own rules, the Investment Advisers Act of 1940 and rules under the act, Mr. Ketchum wrote.
But “Finra does not believe that it would be appropriate ... to impose a broker-dealer-like regulatory regime on investment advisers,” he wrote.
The main problem with adviser oversight is “lack of examination resources,” Mr. Ketchum wrote.
Adding an SRO to the mix “would help ensure a dramatic increase in the frequency of examinations and resources devoted to enforcement,” he wrote in the letter.
Finra is clearly lobbying to take on the SRO role, said David Tittsworth, executive director of the Investment Adviser Association, which opposes Finra as a regulator.
“This letter lays it to rest if anyone had any doubts” about what Finra is doing, he said.
Finra spokeswoman Nancy Condon declined to comment.
The IAA was joined by the Investment Company Institute and the Managed Funds Association — which represent the mutual fund and alternative-investment industries, respectively — in opposing the idea of an adviser SRO. The groups want instead for the SEC to get more resources to beef up its adviser exam program.
Adviser oversight “should be conducted by an independent government agency directly accountable to Congress and the public,” the ICI wrote in a comment letter last month.
Dodd-Frank requires the SEC to report to Congress by January the results of a study on enhancing adviser exams and whether it needs authority to create an SRO for advisers. The SEC has been taking comments on the provision.
Authority to create an adviser SRO would require congressional action.
E-mail Dan Jamieson at [email protected].
