More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
In my column that’s coming out in the July issue of Investment Advisor, I write of what I learned about Mercer Bullard’s SRO for RIAs—the Self Regulatory Organization for Independent Investment Advisors—at the fi360 conference in San Antonio in May, and why it’s important for independent advisors, everywhere. Without going into all the details in the column, and not to be overly melodramatic, I’ve come to suspect that the current debate in Washington about who’s going to regulate RIAs may well determine the survival of independent financial advice.
As some of you may remember, independent advice has been a burr under the saddle of the securities industry since its emergence in the early 1980s. In wirehouse circles, the old IAFP (a forerunner of the FPA) was snidely referred to the as the “International Association of Failed Producers.” Yet, those “failed producers” continued to gain market share; so much so, that in the mid-80s, the NASD (FINRA’s predecessor) was actively lobbying to take over the regulation of financial planners.
Of course, the NASD/FINRA lost that battle when the SEC recognized the newly formed CFP Board (initially called the IBCFP) as the SRO for financial planners, and independent advice continued to snowball. In recent years, the ranks of independent advisors have swollen at an unprecedented rate from the flood of breakaway brokers in the wake of the 2008 Wall Street
Meltdown. One can only imagine the reaction in the boardrooms of FINRA and SIFMA as they watched the accelerating erosion of what they’ve come to see as “their turf.”
With one of their own at the helm of the SEC, in the person of former FINRA Chairman Mary Schapiro, the timing couldn’t have been better for FINRA to make another play to regulate independent advisors, and once and for all, end the now very real threat it poses to the business as usual of securities sales.
In hindsight, I have to wonder whether the fix hasn’t been in since the early days of the Wall Street reform debate: That all the focus on whether brokers should be subject to a fiduciary standard, and what that standard would look like, was merely a red herring to distract attention away from the real goal of FINRA assuming control of independent advisors.
With the SEC chronically under-funded and under-staffed and struggling to keep up with the growing numbers of RIAs, it’s all too easy to argue that the obvious solution is the already well-established FINRA. And now that regulation of brokers and RIAs will be “harmonized,” what sense does it make to have two regulators? Or so the current story goes.
The problem, of course, comes from FINRA’s “rules-based” regulatory system, its self-policing arbitration, and the bureaucracy necessary for firms to comply. With increased regulation comes increased costs: Which is why we’ve seen the consolidation of the brokerage industry over the past decade—and why the much smaller independent advisory firms will become a memory under FINRA’s ham-handed regulation.
It’s not a pretty picture, and at this point, the only hope of the survival of independent advice may be an SRO that offers an alternative to FINRA.