A trade association representing independent broker-dealers and financial advisers is calling on Finra to allow firms to decide for themselves whether to supervise their representatives' work for third-party investment advisory firms.
Earlier this year, the Financial Industry Regulatory Authority Inc. proposed to
streamline brokerages' oversight of outside business activities, including relieving them of their supervisory and record-keeping responsibilities for unaffiliated registered investment advisers.
In a
comment letter last Friday, the Financial Services Institute offered an alternative approach that would allow a brokerage to maintain supervision of an outside RIA if it determine that doing so would be best for investor protection.
"FSI believes that firms are in the best position, based on their risk assessment and internal intelligence, to determine whether investment-related [outside business activities] should be supervised," FSI executive vice president and general counsel David Bellaire wrote in the comment letter. "If they should be supervised, firms are in the best position to determine the nature of the supervision that should be afforded to the proposed activity."
Securities America and Prospera Financial Services used identical language in
separate letters to endorse the FSI alternative. The deadline to submit comment letters was April 27.
"This approach makes sense because firms are in the best position to determine, based on their risk assessment, whether the activities should be supervised," Kevin J. Miller, executive vice president and general counsel, wrote in
Securities America's April 17 letter. "Securities America is in full agreement with FSI on their comments and recommendation."
Although the easing of compliance burdens is generally welcomed by brokerages, when it comes to oversight of unaffiliated RIAs, there also is
revenue at stake. Brokerages typically charge about 5% of an RIA's revenue to provide supervision.
Some dually registered advisers back the Finra proposal to cut oversight strings with brokerages.
John M. Simon, president of Pacific Capital Associates, and his partner are owners and investment adviser representatives of an RIA as well as registered representatives of a broker-dealer.
"Requiring our B-D to supervise our RIA entails an enormous amount of work and expense on both sides, but it provides no advantage to clients," Mr. Simon wrote in an
April 18 comment letter. "Notably, never once has our B-D discovered an actual problem or mistake regarding the allocation of our external RIA accounts."
Chester Hebert, chief executive of Colorado Financial Service Corp., said the current Finra rule requiring brokerages' supervision of unaffiliated RIAs generates "animosity" between the firms.
"The paradigm shift in the industry has created an opportunity for nonaffiliated investment advisers, dually registered with a broker-dealer, to take control of their own destiny without input from their broker-dealer," Mr. Hebert wrote in an
April 4 comment letter. "The broker-dealer would be relieved from the supervision of a business that carries its own regulatory regime."
Finra could modify its outside business activities proposal based on the comments it's received. The proposal is part of a larger rule to streamline oversight of outside business activities to focus on those that are investment-related and most likely to cause investor harm. Finra notes that RIA activity is already overseen by the Securities and Exchange Commission and states.
The SEC would have to approve Finra's final rule.
