More On Legal & Compliancefrom The Advisor's Professional Library
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- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
I’ve written before that the entertainment value alone makes writing about the financial services industry worthwhile. However, there is a dark side as well to this scenario: the resulting brain damage. That is, the damage that occurs to an unsuspecting brain when confronted with a notion so disconnected from its understanding of the real world that it experiences a momentary overload.
I’m struggling to recover from just such a mental meltdown after having just read FINRA CEO Richard Ketchum’s sales pitch for the brokerage SRO taking over regulation of RIAs (as mandated by H.R. 4624), which he was scheduled to make at today’s congressional hearing on the matter. I’ve gone on record many times with my great respect for FINRA and its trade counterpart, SIFMA, not for their business ethics, but for their brilliant marketing acumen. They have the high-priced ability to make even the most absurd, self-serving arguments sound like the inalienable right to life, liberty and the pursuit of happiness.
(Click on this link to view Ketchum's complete testimony before the House Financial Services Committee on June 6, 2012.)
However, the Ketchum testimony before Rep. Spencer Bachus’ House Financial Services Committee isn’t that brilliant. In fact, its nine rambling pages contain only two real points—both of which are so lame as to make my brain involuntarily cry out ‘Really?’ (see my June 5 blog, Figures Don’t Lie. Well, Sometimes They Do, on the use of that happy phrase). The testimony in fact makes me wonder whether Mr. Ketchum is either so sure that FINRA is a lock to become the SRO for RIAs, or that it’s so out of the running that he decided that working on more compelling remarks is just a waste of time.
The first leg of Mr. Ketchum’s pitch is the one that FINRA and its congressional supporters have been skating on for the past three months or so: “…between the Securities and Exchange Commission and FINRA, approximately 55% of [BDs] are examined annually. By contrast, according to the SEC, only 8% of registered investment advisers were examined in 2011… No one involved in regulating securities and protecting investors can be satisfied with a system where only 8% of regulated firms are examined each year. It is completely unacceptable and represents a major gap in investor protection.”
Gap? What gap? my brain started to cry in a continuous loop. Even with today’s big-government mentality in which imposing a tax or passing a law or writing a regulation seems to be synonymous with actually solving a problem, Ketchum equating exam visits with “investor protection” was more than my mind could handle.
An objective observer might point out that the actual data suggests just the opposite. In Ketchum’s own words:
“In 2011, FINRA brought 1,488 disciplinary actions… …expelled 21 firms from the securities industry, barred 329 individuals and suspended 475 from association with FINRA-regulated firms.”
On the RIA side, as I wrote in my March 20, 2012 blog, in 2010 (the last year for which we have data), “the SEC took 113 enforcement actions against investment advisors or investment companies.” That’s 1,488 vs. 113, and those 113 include some investment companies. Even accounting for the difference in the number of brokers vs. RIAs (50,200 retail brokers vs. 41,500 RIAs, give or take), that’s some discrepancy: It would seem that perhaps brokers require more visits because FINRA regulation actually offers less consumer protection.
My old brain was still reeling from Ketchum’s “consumer protection” argument when it got stomped on by his second point: That the costs of a FINRA SRO for advisors will be very reasonable, and that FINRA itself is the best resource for determining those costs. “Much has been said by opponents of increased oversight for investment advisers about the potential costs of an IA SRO…We at FINRA thought it was important to take an accurate and realistic look at what the numbers would actually look like for our organization…Our numbers reflect a realistic estimate for extending FINRA’s examination program to cover investment advisers.”
Mr. Ketchum goes on to attack the significantly higher cost estimates by the independent Boston Consulting Group: “The cost projections in the BCG study…are inaccurate and based on flawed methodology. By its own admission, BCG never consulted with FINRA or the SEC to discuss projected costs of IA oversight.”
So let’s be clear: By conducting a truly “independent” study, rather than taking FINRA’s word about the “reasonableness” of the costs it will incur on a project it’s advocating to undertake, the BCG study is “flawed”? At first, I was certain that senility had finally set in. Then, when the fog start to recede from my mind, I recalled a statement that Mr. Ketchum made just this past April 23, in which he announced his plan to raise BD fees in an effort to offset what he described as FINRA’s “significant loss for fiscal year 2011.”
It seems that despite having “taken a hard look at spending across FINRA to be sure we are operating as effectively and efficiently as possible…the cost of meeting our regulatory mandate is still expected to outpace our revenues.” (See Melanie Waddell’s April 27 AdvisorOne story.) In fact, the broker-dealer SRO is operating so efficiently that it’s now necessary to increase its fees as follows:
- Its minimum advertising filing fees will go up 25%: the maximum fee, up 20%; and the fee for each page over 10 pages, up 100%.
- Its corporate financing fees will go up 50% (from .01% to .015%); and the cap on those fees will increase some 200%, from $75,000 to $225,000.
These not-insignificant increases are to shore up cost overruns in a business that the FINRA and its predecessor organizations (NASD and NYSE Regulation) have been running since 1939 (72 years for you quants).
Now I’m not saying FINRA doesn’t know what it’s doing: We all know that in business, stuff happens. Yet, according to Ketchum, FINRA’s loss resulted from “The broader economic downturn (continuing) to affect trading volumes and industry revenues, which in turn has led to a decrease in FINRA’s revenues.” Yeah, who could have seen that coming? Still, to a skeptical mind, that might suggest that maybe we shouldn’t be so quick to write off those independent cost estimates. (And we’ll just save for another time the issue of FINRA raising its regulatory costs while its member firms are still reeling from the effects of the Great Recession.)
And that’s it: To my mind, Mr. Ketchum’s whole rationale for why FINRA should regulate RIAs boils down to these two points: FINRA makes more visits to brokerage firms, which collectively violate the law a lot more than RIAs; and FINRA can do it in a cost-effective way—despite its recent cost overruns, which somehow failed to find their way into his testimony.
Maybe he knows it’s already a done deal. But I can’t see how the congressmen at today’s hearing, or anyone else who reads Mr. Ketchum’s remarks can saying anything but: “Dude, really?”
(Click on this link to view Mr. Ketchum's complete testimony before the House Financial Services Committee on June 6, 2012.)