More On Legal & Compliancefrom The Advisor's Professional Library
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Financial Services Institute (FSI) on Monday formally endorsed FINRA as the SRO for investment advisors, a highly charged topic that the SEC is authorized to explore under Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dale Brown, the president and CEO of the FSI, said in an interview with AdvisorOne on Tuesday that the “bottom line”on FSI’s decision to endorse FINRA was that such an SRO would be “best for investors, since it addresses the most significant problem in the current structure: the huge gap between how broker-dealers are regulated and how investment advisors are regulated.”
Brown further situated the decision as consistent with the independent broker-dealer (IBD) group’s position throughout the congressional and regulatory debate on harmonization of rules and instituting a strong fiduciary “standard of care” that the best way to address the regulatory gap “is an SRO.”
Answering a question on why the SEC shouldn’t continue to regulate RIAs, Brown was quick to admit that “no one’s questioning the commitment to the cause of the SEC, nor state regulators.” However, Brown noted that “there are serious questions about resources—the SEC has never had the resources to do its job. The SRO addresses that resource issue.”
Moreover, FSI was swayed, Brown said, by the argument for establishing an SRO under which “the cost of the regulation is borne by the industry, not affected by the swings from the congressional process. It creates certainty in terms of the resource allocation.”
Responding via e-mail to the endorsement, Dan Barry of the Financial Planning Association took issue with FSI’s written contention, attributed to the group's chair, Mari Buechner (left), president and CEO of Coordinated Capital Securities, that a “regulatory structure that places the same emphasis on the examination” of RIAs, BDs and their affiliated advisors ”will enhance investor protection.” Barry says that argument “ignores that fact that despite years of blurring, there are real differences between a broker-dealer and an investment advisor business that require different oversight.”
The FPA is part of the Coalition for Financial Planning which filed its own comment letter with the SEC on Dec. 16 on the issue of an SRO for advisors.
Addressing the resources issue raised by Brown, Barry, FPA’s managing director of government relations and public policy, went on to say that establishing an SRO for advisors “is just a waste of limited resources.” Regardless of whether FINRA or some other organization is named as the SRO, “a significant amount of money would have to go into developing a new infrastructure, when we already have one that’s been in place for decades at the SEC and in the states,” Barry (left), says. “Outsourcing oversight,” he concludes, "is the wrong answer."
The SEC itself has admitted that it has limited resources to implement all the new offices, studies and rulemakings dictated under Dodd-Frank, to the point of listing on its website those provisions it was postponing because of “budget uncertainty.” The congressional failure to pass an omnibus spending bill in mid-December for the current Federal fiscal year has only compounded the funding issue for the SEC.
Section 914 under Title IX of Dodd-Frank gives the SEC the job of exploring “the need for enhanced examination and enforcement resources for investment advisers,” including the option of determining if designating “one or more self-regulatory organizations to augment the Commission’s efforts in overseeing investment advisers would improve the frequency of examinations of investment advisers.”
Assuming a Fiduciary Standard WIll Be Implemented
Brown said the FSI assumes that the SEC will make its recommendation on an SRO for RIAs “sometime in January or February,” around the same time that the Commission will make a determination on whether one fiduciary standard should be applied to all professional advice-givers.
“We’re operating under the assumption that the SEC will institute a fiduciary standard of care,” Brown said in the interview, pledging further that the FSI will work with the SEC on “implementation of that standard so that it works for all business models and client situations.” FSI’s members, says Brown, “have been dual registrants for decades. We’re not at all opposed to a higher fiduciary standard, but it’s got to be workable so there’s no unintended consequence of pushing advice out of the reach of smaller investors.”
That has been FSI’s position, Brown stresses, “since the beginning of the debate.” Specifically, he says a fiduciary standard has to work in a commission-based model “so that investors still have access and choice: affordable access and choice."
There is great disagreement within the industry over making FINRA the SRO for RIAs, however. Planner and advocacy groups that have lined up against the choice of FINRA include the Financial Planning Coalition (comprising the CFP Board, NAPFA, and the Financial Planning Association), the CFA Institute, the Managed Funds Association, the Investment Company Institute (ICI), the North American Securities Administrators Association (NASAA), and the Investment Advisers Association (IAA).
The issue has been the source of much commentary in the blogosphere, both at AdvisorOne.com and over all. For instance, David Massey of NASAA (left), recently blogged on the state securities regulators group’s opposition to FINRA as the SRO at AdvisorOne.com. David Tittsworth of the IAA explored what he called the “illogic” of designating FINRA as RIAs’ SRO in another AdvisorOne blog. The Financial Planning Coalition filed a comment letter with the SEC—also opposed to an SRO—on Dec. 16.
‘Eyes Wide Open’ on FINRA’s Limitations
The FSI has in its seven years of existence often taken FINRA to task, and Brown concedes that while “FINRA as a broker-dealer regulator still needs to improve, we are constructively engaged with them” to foster that improvement. Brown says the decision to endorse FINRA as the SRO for advisors is “made with eyes wide open to FINRA’s strengths and challenges,” but that clear-eyed vision “doesn’t negate that this is the best option available to close the regulatory gap.”
Should the SEC determine under Dodd-Frank that FINRA is the appropriate SRO for RIAs, Brown expects that FSI will “have the same level of constructive engagement with them.”
Brown concludes by contrasting the current regulatory “status quo” with that of the near future if the SEC “moves ahead with an SRO for advisors, and if FINRA gets that responsibility.” Combined with the SEC “moving ahead with a fiduciary standard of care—done right—that’s a vast improvement for investors over the current situation.” Investors, he says, will no longer have to worry about “clarity on disclosure, on the legal standards,” nor that they’re getting advice from “somebody whom the SEC hasn’t seen in 10 years.”