More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
As the first-ever financial advisor to chair the Financial Services Institute (FSI), I know many of our financial advisor members have questions on why FSI is backing FINRA as the SRO for RIAs. It's time we have a frank, candid discussion on our thinking. Please keep reading to find out why we're supporting FINRA as the SRO for RIAs.
As we travel around the country speaking to financial advisors one thing has become very clear—there's a lot of noise coming out of Washington, D.C. (we know we are not telling you anything new), and there's a real need for us to have a candid conversation about our most pressing issues with our members so that you not only know what we are working on but why we are taking the positions we are taking on these issues.
This first one is the most timely: our push for a self-regulatory organization (SRO) for RIAs to help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.
Two quick things: One, FSI endorsed FINRA as the SRO for RIAs over a year ago and very publicly, so this isn't new for us; two, we've twice polled our financial advisor members on this issue, and roughly 75% agreed with our position. That being said, even those who see the logic behind it aren't thrilled with giving FINRA greater reach and responsibility.
So let us say this: we are by no means oblivious to the many challenges FINRA creates as our industry's principal regulator, nor are we saying there won't be problems with FINRA in this expanded role. What we do know is that there is a political reality that FSI must deal with on behalf of our members, and that reality is called the Dodd-Frank Act.
Dodd-Frank recognized the regulatory gap that currently exists: only 8% of RIAs were examined by the SEC last year, an average of once every 13 years, and nearly 40% of RIAs have never been examined. To protect consumers and level the playing field, this regulatory gap must be eliminated. Dodd-Frank mandated a study which ultimately directed the SEC to develop options to close the gap. The SEC responded with three:
1) Give the SEC more money to hire more examiners through user fees on RIAs (political fantasy).
2) Have FINRA serve as the SRO for dual registrants (encouraging advisors to go RIA only and continue to skirt examination).
3) Draft legislation empowering the SEC to approve an SRO for advisers (the only political reality).
Knowing that left to their own devices Washington often gets it wrong, FSI knew we had to take a position that would best serve investors and our members and see it through to the end. No sitting safely on the sidelines. After careful consideration and deliberation, our Board took the bold position that the only viable solution, politically and practically, is to support FINRA as the SRO for RIAs. There is no escaping the fact that this is a classic "the devil you know versus the devil you don't" situation.
Now, because of our understanding of Washington, we know a lot of what we've heard stems from a misunderstanding of the political reality by some of our members. We've heard some ask us, "Why don't you spend your time and energy advocating for the full repeal of Dodd-Frank and not FINRA as an SRO?"
While you won't find any raving fans of Dodd-Frank at FSI, we also intimately know the political reality, and that is that the law is here to stay for the foreseeable future. In fact, I'd go as far to say that, even if Republicans win not only a majority in the Senate, but a super majority (60 votes), the bill still wouldn't be repealed. You'd most likely need about 65 Republicans in the Senate to make up for those that you'd lose on the vote to get it to the president's desk.
So while we know it would make some of our members feel good to see us advocate for the repeal of Dodd-Frank, it wouldn't do any good, and wouldn't be spending the resources and influence you are giving us wisely. To put it in industry terms, we wouldn't be acting as good fiduciaries—in fact, our approach wouldn't even be suitable; it would just be irresponsible. It would marginalize not only FSI but the industry we represent and seriously impede our ability to impact any issues going forward.
Now that we've established Dodd-Frank isn't going away any time soon, and Dodd-Frank provides an opportunity for this regulatory gap to be closed, is it going to be the SEC, FINRA or a brand new bureaucracy no one knows? For us, the answer wasn't pleasant, but it was simple: the devil we know.
First, everyone in D.C. knows that this Congress is never, ever, going to give the SEC more money.
Second, the SEC is fraught with problems. Lest we forget, the numerous staff were caught surfing porn rather than doing jobs, revolting over BlackBerrys so they didn't have to work outside the office, renting office space they don't need, leaving a beneficiary of Bernie Madoff in charge of liquidation, investigating their watchdog after he issued unflattering reports, and on and on and on.
With all of the SEC's very public problems, and with the SEC's own Chair, Mary Schapiro, finally endorsing the SRO option, anyone who claims the SEC is a viable alternative isn't being intellectually honest in terms of political reality. In addition, not all, but some of those pushing the SEC knowing this political reality are in fact doing so simply to keep the status quo.
The option of a brand-new SRO or multiple SROs is also troubling. For FSI to back a strategy that could set up one or more new regulators that we don't know and don't have influence with wouldn't be taking full advantage of the relationships we've worked years on strengthening.
You then add to the mix the fact that the Consumer Federation of America dropped its 20-year opposition to an SRO and you can see that the tide was clearly turning.
FINRA, as we said from the beginning, isn't perfect. They are actually nowhere near perfect. But they do have the resources to do the job, and they would be much more affordable for our members from a small business cost standpoint than the SEC user fee proposal.
FSI has a good working relationship with FINRA. There is an FSI member on the FINRA Board, there are 20 FSI members on FINRA district committees and FSI senior staff has a close working relationship with FINRA senior staff. Certainly, we don't always get what we work for with FINRA; we wish we could say we had a perfect record, but we don't. But we do have many wins in terms of changing proposed rules and regulations coming from FINRA to our members' benefit that we can hang our hat on.
If FINRA becomes the SRO for RIAs, FSI pledges to you that we will stop at nothing to try and ensure the most responsible, efficient and least intrusive regulator for RIAs as possible while protecting investors. And if FINRA's not doing it job, you'll hear it from us first.
We're here to create a healthier, more business-friendly regulatory environment for you, our members. We're here to make your life easier, your business more prosperous, and preserve your clients' access to your much-needed services—period.
And we truly believe that with FINRA in place regulating RIAs, we'll finally help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.