More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Richard Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA), omitted a crucial detail in a recent interview he gave.
While he was forthcoming in revealing that FINRA was abandoning its fight to have the House Financial Services Committee revisit this year the SRO bill championed by the committee’s former chairman, Rep. Spencer Bachus, which would have given FINRA the right to take over advisor oversight, he craftily failed to mention the fact that FINRA had shifted its fight to the Senate.
Indeed, as I learned from several industry sources, FINRA is now trolling the Senate for SRO backers.
“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 Bachus’ bill come up for a vote at the committee level last year, said Ron Rhoades (right), assistant professor and chairman of the financial planning program at Alfred State College.
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 said, no supporters have surfaced yet.
Another industry executive told me this: “Keep watching” what happens in the Senate. “This [SRO] issue isn’t going away.”
Comments made by Ketchum to Reuters in early February 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.”
A FINRA spokesperson told me a day after the Reuters story was published 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 who 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.
Another reason FINRA likely shifted its SRO strategy to the Senate is the fact that the Financial Planning Coalition is—and has been—seeking senators who would back a user-fees bill.
Nystrom said in November that the 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 me in early February 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 said.
The coalition, she continued, “is not backing off its position now.” FINRA and the coalition, she said, “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 say FINRA will continue its crusade.
David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, said 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 difficulties in adequately examining advisors “have not disappeared,” Tittsworth (right) added. 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 added 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 said, 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 said IAA “will remain vigilant” regarding FINRA’s potential expansion of its jurisdiction, and will “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, said 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 agreed 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 said. “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 continued, “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.”