More On Legal & Compliancefrom The Advisor's Professional Library
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
In case it wasn't clear before, last week the Financial Industry Regulatory Authority made it very clear that it's ready, willing and able to extend its jurisdiction to RIAs.
FINRA (which changed its name a few years ago when NASD merged with the regulatory arm of the NYSE) is the self-regulatory organization (SRO) for the broker-dealer industry. In a November 2 letter to the SEC, FINRA CEO Rick Ketchum urged the SEC to "seek authority to establish one or more self-regulatory organizations (SROs) for investment advisers."
Mr. Ketchum's rationale is that the SEC has insufficient resources to oversee the investment advisory profession. He points out that FINRA examines about half of all broker-dealers each year while the SEC only examines 9% of investment advisors.
The rest of the letter is largely devoted to extolling the virtues of SROs in general and FINRA in particular. If you have any interest in whether FINRA should be able to inspect your firm—and issue regulations governing investment advisors—you should take a few minutes to review the full text of the letter.
The FINRA letter also refers to the comment letter that my group, the Investment Adviser Association, filed, calling it "troubling" and alleging that the IAA supports the "status quo."
I respectfully disagree with FINRA's mischaracterization of our positions. We have consistently stated that the SEC should have adequate resources to ensure robust and effective oversight of investment advisors. We have supported a variety of measures to achieve this result, from self-funding for the SEC to user fees for investment advisors in lieu of expanding FINRA's turf. Far from supporting the status quo, we have sought to address the SEC's resource constraints and to improve the effectiveness of its oversight program.
What we have not supported is an SRO for investment advisors. Similar views have been expressed by the ICI (representing mutual funds) and MFA (representing hedge funds).
Evidently, FINRA believes that the measure of effectiveness is the frequency of examinations. Using this logic, the program that logs more examinations is superior to one that logs fewer.
The SEC will issue a report in mid-January that likely will conclude that Congress should enact legislation to authorize one or more SROs for investment advisors. Obviously, this would be the precise result FINRA is seeking.