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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Financial Industry Regulatory Authority has now set its sights on the Senate to push a bill that would give FINRA the authority to become the self-regulatory organization (SRO) for advisors, as the House Financial Services Committee is unlikely to pursue an SRO bill this year.
“FINRA has been trying for several months to quietly obtain sponsors for an SRO bill in the Senate, rather than in the House” where the self-regulator failed to have former House Financial Services Committee Chairman Rep. Spencer Bachus’ bill “come up for a vote at the committee level last year,” Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College, told AdvisorOne on Thursday.
Karen Nystrom, head of public policy and advocacy for the National Association of Personal Financial Advisors (NAPFA), confirmed that rumors have indeed been swirling that FINRA is seeking Senate sponsors for an SRO bill. However, she told AdvisorOne, no supporters have surfaced yet.
Comments made by FINRA CEO Richard Ketchum (right) to Reuters on Wednesday seemed to give advisors a glint of hope that FINRA had decided to abandon its efforts to become the SRO for advisors. Ketchum said that FINRA would forgo, for now, its attempts to get the House Financial Services Committee to revisit this year Bachus’ SRO bill, particularly since newly christened chairman Rep. Jeb Hensarling, R-Texas, has taken the helm. “I’m not a big believer in beating a head against the wall,” Ketchum told Reuters. “We’ll focus on things we can impact.”
Ketchum did not respond by publication to AdvisorOne’s request for confirmation that FINRA was seeking a Senate SRO bill sponsor.
A FINRA spokesperson told AdvisorOne on Thursday that "while there is shared concern about the lack of resources devoted to IA oversight, there is clearly a lack of consensus about how best to address that problem. It remains a critical investor protection issue and our views remain that it should be addressed as soon as possible."
While "other issues" are closer to the top of Congress’ agenda, the advisor SRO issue "will likely not be resolved in the near term. Hopefully for investors that entrust their funds to investment advisors, the issue will get another look in the not-too-distant future," the spokesperson said.
Hensarling, who took over in January, is said not to be keen on Bachus’ SRO bill and is likely to focus on other issues this year, such as reforming Fannie Mae and Freddie Mac as well as certain aspects of the Dodd-Frank Act.
Nystrom said in November that the Financial Planning Coalition planned this year to thwart passage of an SRO bill by ensuring a “bipartisan bill” originates in the Senate allowing the Securities and Exchange Commission (SEC) to collect user fees from advisors to fund their exams. She told AdvisorOne on Thursday that the coalition—which includes NAPFA, the CFP Board and the Financial Planning Association—“still believes” user fees are the best way to ensure advisors are examined more often.
“The coalition very much takes the investor protection issue” of advisor exams “seriously, and wants to improve the examination process and increase the frequency” of advisor exams, Nystrom told AdvisorOne on Thursday.
The coalition, she continued, “is not backing off its position now that FINRA has publicly announced it is stepping away from the investor protection issue. We have had different approaches and agree that given that there was little appetite in Congress for an IA SRO, wasting resources is not prudent.”
While the advisory industry would indeed breathe a collective sigh of relief if FINRA decided to flat out abandon its efforts to become the SRO for advisors, industry officials reached by AdvisorOne say FINRA will continue its crusade.
David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, says Ketchum’s remarks signal that “FINRA recognizes the reality that Congress has other priorities, that the SEC has not been united on the [SRO] issue, and that FINRA has determined that, for the time being, it may be more fruitful to pursue other initiatives.”
However, Ketchum “makes it clear” that the SEC’s abilities to adequately examine advisors “have not disappeared,” Tittsworth adds. As Ketchum told Reuters: “When you don’t go in and examine an entity on a regular basis, the potential for a Ponzi scheme is much greater,” citing a lack of manpower and financial resources at the SEC as the root of the problem.
Rhoades adds that he fully expects FINRA “to continue to adjust its policies and procedures and try to take over the investment advisor space, over time,” noting FINRA’s recent move to open up its arbitration process to investment advisors.
FINRA’s lobbying course “can swiftly change,” Rhoades says, pointing to FINRA stating “very clearly” in 2007 “that it had no interest in oversight of RIAs, only to pursue that agenda a few years later. Hence, all independent investment advisors should remain on guard.”
Tittsworth says IAA “will remain vigilant” regarding FINRA’s potential expansion of its jurisdiction, and “continue to support ways to ensure that the SEC has adequate resources to enhance its oversight of investment advisors,” such as the user-fee legislation that was introduced by Rep. Maxine Waters, D-Calif., last summer.
While FINRA is making a “sensible move” by deciding to back away from further lobbying in the House on the SRO issue, says Barbara Roper, director of investor protection for the Consumer Federation of America, “unfortunately Congress continues to ignore its responsibility to adequately fund the SEC to do its job, in this case police investment advisors, leaving investors vulnerable to fraud.”
Rhoades agrees that it’s time for the SEC to refocus its exam efforts. “The SEC’s current examination program treats independent fee-only RIAs without custody—the purest of the ‘white hats’—as criminals,” Rhoades says. “The SEC needs to use its limited resources to go after the actual criminals, rather than camping out for weeks doing an overbearing examination of an RIA, in an attempt to find even the smallest transgression of its onerous rules.” By focusing on actual fraud, he continues, “rather than technical violations of rules, the SEC can substantially increase the frequency of exams and, in so doing, assist in restoring the trust of individual investors to our financial system.”