More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
The Financial Services Institute (FSI) applauds the hard work of the Securities and Exchange Commission (SEC) staff given their time and resource constraints to complete the study on enhancing investment advisor examinations mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
We commend the Commission for identifying options to solve the very real problem of inadequate examination and enforcement resources for investment advisors. We wholeheartedly agree with and support Commissioner Elisse Walter’s assessment of the magnitude and urgency of the problem.
The SEC provided three options for Congress to consider, including:
- Authorizing the Commission to impose user fees on SEC-registered investment advisors to fund their examinations by the Office of Compliance Inspections and Examinations (OCIE)
- Authorizing one or more self-regulatory organizations (SRO) to examine, subject to SEC oversight, all SEC-registered investment advisors; or
- Authorizing FINRA to examine dual registrants for compliance with the Investment Advisers Act of 1940 (Advisers Act)
We believe that the only option that addresses the serious regulatory gap that exists today is the authorization of an SRO to examine all SEC-registered investment advisors. As long as some providers of retail financial advice are subject to vigorous oversight and examination and others are not, investors are at risk. The SRO option will close the regulatory gap.
Further, industry input into the SRO’s rulemaking process will ensure that regulators protect the investing public while also considering negative unintended consequences. An SRO for investment advisors is an essential part of any serious effort to enhance investor protection.
FSI endorsed FINRA as the SRO for registered investment advisors in late December 2010. FINRA has extensive knowledge of the overlapping nature of financial services offered by broker-dealers and investment advisors. Additionally, FINRA has experience in performing regulatory examinations of financial service providers and has experience operating an SRO whose structure is designed to ensure its governing body, committees and staff act in the public’s best interests.
As it stands today, given the large budget and staffing shortfalls noted in both the SEC’s study and Commissioner Walters’s statement, the average investment advisor can expect to be examined only once every 11 years. The existence of a well-funded, experienced self-regulatory authority, such as FINRA, would allow for more frequent investment adviser examinations.
FSI believes that the new regulatory configuration would result in a layering of effective specialized regulatory entities that mirrors the structure utilized to supervise broker-dealer firms. Under the supervision of the SEC,
FINRA as the SRO would focus on the routine examination and supervision of all investment advisors.
By delegating primary responsibility for investment advisor exams and supervision to FINRA, the SEC would be free to focus on capital markets concerns, the development of appropriate regulations for all regulated entities, the supervision of the new investment adviser regulatory authority, and the fulfillment of other appropriate regulatory goals.
FSI agrees with Commissioner Walters’s assessment that many of the benefits of the user fee option are shared by the SRO option. The SRO option would provide OCIE with much-needed resources to perform more frequent investment advisor examinations, more flexibility to develop and determine emerging risks associated with advisors, and greater capability to develop and utilize needed technology to strengthen the advisor program. Additionally, with an SRO, the cost of regulation would be shifted to industry participants rather than taxpayers.
The third option proposed by the SEC to authorize FINRA to examine dual registrants for compliance with the Advisers Act has significant flaws for investors. Unfortunately, this would not close the regulatory gap. In fact, it has the potential to exaggerate it. Financial advisors who wish to avoid close regulatory scrutiny of their business could opt out of FINRA supervision by dropping their broker-dealer affiliation and move to either SEC or state oversight. This would not enhance investor protection.
Dale Brown is the president and CEO of the Financial Services Institute (FSI), an advocacy organization for independent broker-dealers and independent financial advisors. Established in January 2004, FSI has over 120 broker-dealer members and over 15,500 financial advisor members. FSI’s mission is to create a healthier regulatory environment for independent broker-dealers and their affiliated independent financial advisors through aggressive and effective advocacy, education, and public awareness. Its strategy includes involvement in FINRA governance, constructive engagement in the regulatory process and effective influence on the legislative process. FSI is headquartered in Atlanta with an office in Washington, D.C. For more information, visit financialservices.org.