Financial advisers are up in arms about the
prospect of Finra's taking over the regulation of investment advisers from the SEC — an idea that has been gaining steam in recent months.
With the Securities and Exchange Commission woefully understaffed and about to take on a wave of new responsibilities as part of the Dodd-Frank Act, discussions are heating up about naming the Financial Industry Regulatory Authority Inc. to oversee all advisers who fall under the Investment Advisers Act of 1940 — including advisers of mutual funds — who manage more than $100 million in assets.
“The resources at the SEC are completely inadequate, and the answer being teed up is having Finra be the [regulator] for all advisers,” Barbara Roper, director of investor protection for the Consumer Federation of America, said during a panel discussion at the Financial Planning Association's annual conference in Denver last week. Because Congress failed to approve a new budget by Oct. 1, the SEC is one of many federal agencies operating under its current budget.
Despite the lack of resources, advisers are lobbying against the idea of the SEC's transferring regulatory oversight to Finra.
(See what other IN readers are saying about the potential for Finra's authority to expand.)
“We oppose a self-regulatory organization for investment advisers, and we particularly oppose the idea of Finra as the SRO,” said David Tittsworth, executive director of the Investment Adviser Association. “We oppose it because of their lack of transparency, their lack of accountability, their track record and, perhaps most importantly, because of their bias favoring the broker-dealer model.”
Finra has been angling to take on the added role for months, saying that it would help Congress' efforts in harmonizing rules for broker-dealers and investment advisers.
“Finra believes that Congress should authorize the SEC to designate one or more independent regulatory organizations to augment the SEC's efforts in overseeing investment advisers to better protect investors, regardless of how their financial professional is registered,” said Richard Ketchum, Finra's chief executive, during testimony before the House of Representatives last October. Nancy Condon, a Finra spokeswoman, declined to comment.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July, requires the SEC to conduct a six-month study on whether an SRO would enhance the frequency of investment adviser examinations. The legislation also requires the SEC to hire an independent consultant to examine the commission's reliance on SROs.
Investment advisers don't think that Finra has the same kind of expertise in how they do business that the SEC does, some said.
CONCERNS OVER COMPETENCY
“Advisers don't trust Finra,” said Tom Bradley, president of TD Ameritrade Institutional. “Most advisers don't feel that Finra has the competency to cover [registered investment advisers].”
Specifically, advisers are concerned that Finra's rules-based approach won't be able to address the principles-based RIA business, said Daniel Barry, managing director for government relations and public policy at the FPA.
“The SEC has been regulating advisers for 60 years,” he said. “They have the experience; it's just a matter of getting them the resources.”
The IAA thinks that the SEC is in a good position to remain the sole regulator of investment advisers, Mr. Tittsworth said.
The Dodd-Frank Act reduces the SEC's oversight of advisers by moving those with between $25 million and $100 million in assets to the jurisdiction of state regulators. Previously, the SEC regulated advisers with assets of $25 million and above. As a result of the legislation, the SEC's budget will double to $2.25 billion in 2015, from $1.2 billion in 2011.
“Why is another entity needed?” Mr. Tittsworth asked. “The SEC is there, and they have the experience.”
But as the Bernard Madoff scandal showed, the SEC needs help with its enforcement efforts, Mr. Bradley said.
“The SEC is going to be responsible for a lot more, and they need to bring in more experienced forensic accountants, and not just lawyers,” he said. “They need people who are focused on sniffing out things that don't make sense.”
John Heine, an SEC spokesman, declined to comment.
Some advisers said that choosing between the SEC and Finra is like choosing between the lesser of two evils.
“The SEC is too regulatory-minded, and they don't think in practicalities,” said J. Alan Favre, a vice president at CIM Securities LLC, which has $250 million in assets under management. “Finra, however, doesn't understand our business.”
One notion that has cropped up in discussions on Capitol Hill is the idea of establishing a whole new regulatory body for investment advisers, said one person familiar with the discussions, who asked not to be identified.
The Dodd-Frank Act calls for the Government Accountability Office to study whether the financial planning industry should be more tightly regulated, and the Certified Financial Planner Board of Standards Inc. is pushing for the formation of an oversight board that would report to the SEC and set standards to guide the competency and ethics of planners, said Marilyn Mohrman-Gillis, managing director of public policy and communications at the CFP Board.
She declined to comment about whether the board is in talks with other groups about its overseeing all investment advisers.
The IAA has spoken to the GAO but takes the position that the SEC should be the sole regulator of investment advisers, Mr. Tittsworth said.
'LEGAL DEFINITION'
“We have a legal definition of investment advisers,” he said. “If you can tell me what the definition of financial planners is, it would be easier for me to say whether these other ideas have merit.”
But it might be worth it for the industry to investigate the idea of creating a new entity to regulate investment advisers, Ms. Roper said.
“Instead of everyone just saying, "Somebody's got to do it — oh, and Finra is waiting in the wings,' let's take time and figure this out,” she said.
E-mail Jessica Toonkel at jtoonkel@investmentnews.com.
