Finra championing adviser SRO — and its own suitability for the job

The Financial Authority Industry Regulatory Inc. has spent hundreds of thousands of dollars this year lobbying Congress to authorize a self-regulatory organization for investment advisers — a role it would like to fill itself. The broker-dealer regulator won't know for a while whether it's efforts will pay off. Congress likely will hold a hearing this summer that provides an initial indication of which way lawmakers are leaning on how to increase 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, Finra chairman and chief executive, said today at Finra's annual conference in Washington. “It's a difficult political environment right now.” But Mr. Ketchum is confident that Capitol Hill will address the issue, perhaps during the current congressional session, which runs until December 2012. The Securities and Exchange Commission delivered a report to Congress in January proposing three ways to bolster adviser oversight — allowing the agency to charge a user fee for exams; establishing a self-regulatory organization for advisers, or allowing Finra to extend its reach to investment advisers who also are registered as broker-dealers. Any of the options must be authorized by Congress. The report, mandated by the Dodd-Frank financial reform law, also reiterated that the commission examines only 9% of the 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. “Hopefully, it will be an SRO. I can't predict whether it will be this year, next year or the year after.” Meanwhile, the regulator 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. Mr. Oxley was chairman of the House Financial Services Committee. Investment advisers are fiercely resisting the notion that Finra, the SRO for broker-dealers, would also oversee them. They worry that Finra's rules-based enforcement of the suitability rule — which requires brokers to recommend products that fit their clients' needs — gives it a poor foundation for conducting oversight of the principles-based fiduciary duty. That duty requires advisers to act in the best interests of their clients. 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 was the investment-adviser model. “We have an incredibly uneven playing field that is becoming more uneven every day,” Mr. Casady said. “We have to have an SRO for both [broker-dealers and investment advisers]. We have to be sure we're evenhanded.” LPL is deeply involved in the issue on Capitol Hill, having hired a lobbying firm and setting up an outreach program for its advisers to contact lawmakers. Adding more uncertainty to the mix: Republicans have taken over the House. Mr. Ketchum asserted that the political change won't necessarily affect the congressional disposition toward an SRO. “I've never seen investor protection as a Republican or Democratic issue,” Mr. Ketchum said. Nevertheless, there is a tendency among Republicans to view user fees as taxes, which are anathema to the party. That posture would seem to make the GOP favor an SRO. But 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 that the SEC maintain its role as the primary adviser regulator. To do so, it would need to charge user fees, which means Ms. Mohrman-Gillis has to convince Republicans they're not taxes. In her meetings, she makes the point that advisers will have to pay for more examinations – the question is whether the charges come as user fees to the SEC or fees to an SRO. “The industry will be assessed an amount of money to increase oversight,” Ms. Mohrman-Gillis said. “We need to have increased oversight. 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.” Legislators likely will take some time before they reach any conclusion on an SRO. “There's lots of other issues in Dodd-Frank that are attracting a lot more attention,” Mr. Casady said in an interview after speaking on a Finra-conference panel. “I wouldn't be surprised if this is a three- to four-year discussion with the Hill. We're settled in to do that.”