From the March 2009 issue of Investment Advisor • Subscribe!

Broker/Dealer Briefing: A Shot Over the Bow

A new sweep may be FINRA's opening salvo to regulating RIAs

More On Legal & Compliance

from The Advisor's Professional Library
  • Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times.  Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
  • The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations.  When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.    

The regulatory stew in Washington is beginning to come together, with Mary Schapiro confirmed to chair the SEC and with the Commission's enforcement chief, Linda Chatman Thomsen, having resigned in early February under pressure from Congress, specifically for the SEC's failure to detect and prevent the Bernie Madoff Ponzi scheme. In the background, however, another regulatory ripple has been launched that may become a tsunami: FINRA is quietly conducting a sweep of broker/dealers that could be the first steps to having the SRO take over regulation of registered investment advisors from the SEC--something the former NASD has long desired.

In mid January, FINRA's Enforcement Department sent out a letter to an unspecified number of broker/dealers asking if each B/D had referred any clients to RIAs for the express purpose of receiving investment advisory services. In particular, FINRA is seeking information on whether any of those broker/dealers referred business to Mr. Madoff and, if so, what the procedure was that the B/Ds filed. FINRA wants to see documentation for such activities that took place during the review period from January 1, 2006, through December 31, 2008.

This, says securities attorney Brian Rubin of the Washington, DC-based law firm Sutherland, could be the first step in a FINRA lobbying campaign to assume the SEC's oversight of RIAs. "It's Madoff-related, yes," admittted Rubin in an interview January 29 during the annual gathering of the Financial Services Institute (FSI), but "part is broader than that," suggesting that once FINRA gathers the information on business referrals to RIAs, they may "use it as ammunition" in its attempt to gain oversight of RIAs.

The B/Ds subject to the sweep were to have filed their responses by February 6, but Rubin suggested many would get extensions.

Suggestions for Mary

In a session during the FSI conference on the critical regulatory issues facing broker/dealers, there were some pointed suggestions for what the new SEC chairman should--and shouldn't--do.

One topic was a federal charter for insurance companies. "The states are not in favor" of the proposal, said Brian Murphy, chairman of Woodbury Financial, The Hartford's independent B/D, "but The Hartford is in favor of it." Murphy said the current system of "having 50 judges" creates a "difficult environment," but that having "one agency for licensing and product approval will help fix a broken system."

Speaking of which, in responding to the question of what Schapiro's priorites should be in her first 100 days at the SEC, Murphy suggested she "focus on the gaps and stay away from the rhetoric that everything is broken." Warning of the drawbacks of regulatory over-reaction, especially to the Madoff scandal, Murphy used a metaphor. "If you're running a city and you decide you're going to stop the bad guys by frisking every citizen, by stopping every car at roadblocks, and placing governors on every vehicle so they can't travel over 10 miles per hour--well, I don't want to live in a city like that."

Reprints Discuss this story
This is where the comments go.