An advocacy group that has been the most vocal in supporting Finra's effort to expand its reach to include investment advisers isn't saying that the devil made it do it.
But a week before a House hearing on legislation that would pave the way for the Financial Industry Regulatory Authority Inc. to assume the adviser oversight role, the chairman of the Financial Services Institute Inc. tried to ease adviser qualms about Finra's becoming its regulator by saying that it is best to be overseen by “the devil we know.”
At the same time, the Project on Government Oversight, a watchdog group that promotes government reform, sent a
letter to members of the House Financial Services Committee urging them to reject the legislation that would authorize one or more self-regulatory organizations to oversee advisers. The group asserted that Finra, the broker SRO, is riddled with conflicts of interest and lacks transparency.
In a
letter released Tuesday, FSI Chairman Joe Russo said that his group faces the reality that under the Dodd-Frank financial reform law, advisers will be subject to more-frequent examinations. The question is whether the regulator conducting them will be the Securities and Exchange Commission, as is now the case, Finra or a new entity.
Congress is unlikely to give the SEC the funding required to increase the examinations that it conducts, which total annually about 8% of nearly 12,000 registered advisers, said Mr. Russo, chairman and chief executive of Advantage Financial Group Inc.
The FSI is backing Finra as the adviser regulator and throwing its weight behind the SRO bill written by House Financial Services Chairman Spencer Bachus, R-Ala.
His measure, which will be the topic of a June 6 hearing, responds to a January 2011 SEC study that indicated that the commission lacks the resources to increase adviser examinations. It recommended that Congress allow the agency to charge a fee for exams, establish an SRO or allow Finra to expand its oversight to include advisers dually registered as brokers.
The FSI is an ardent backer of the SRO option, and it specifically calls for Finra to fill that role.
“For us, the answer wasn't pleasant, but it was simple: the devil we know,” Mr. Russo wrote.
“Finra, as we have said from the beginning, isn't perfect. They are actually nowhere near perfect,” Mr. Russo wrote.
“But they do have the resources to do the job, and they would be much more affordable for our members from a small-business cost standpoint than the SEC user fee proposal,” he wrote.
The cost of an SRO is hotly disputed. Finra, which is pushing to be the adviser SRO, said that startup costs would be about $15 million, with annual costs topping out at $155 million.
A Boston Consulting Group study, released in December and sponsored by several anti-SRO groups, estimated that the setup bill would total $255 million and that the annual cost would be $610 million.
Both sides agree, however, that the number of annual adviser examinations should be increased. They disagree sharply on who should do it.
Mr. Bachus said that his measure would increase investor protection because Finra examines about 58% of brokers annually, almost six times the number of registered investment advisers that the SEC reviews.
Mr. Russo stressed the same point.
“To protect consumers and level the playing field, this regulatory gap must be eliminated,” he wrote. “And we truly believe, with Finra in place regulating RIAs, we'll finally help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.”
The government oversight group, however, said that the SEC should maintain oversight of advisers because Finra has “an inherent conflict of mission” because it collects fees from its member firms and invests in the securities industry while overseeing the sector.
“Finra's inherent conflict of mission, its lack of transparency and accountability, and its excessive expenditures on executive compensation and lobbying illustrate why creating an SRO for investment advisers will not serve the interests of investors, shareholders, consumers or other stakeholders,” the government oversight project wrote in its letter. “In addition, creating a private self-regulatory group for investment advisers would create significant costs and oversight challenges for the SEC.”
Finra has said repeatedly that conflict-of-interest threats are addressed by the fact that a majority of its board comprises public rather than industry members. It also has said that it would set up a separate governance structure for advisers that would be sensitive to the unique characteristics of the sector.
