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Regulation and Compliance > Federal Regulation

FINRA’s Approach to RIA Regulation: If You Can’t Beat ‘em, Test ‘em.

By Bob Clark

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In case you missed it, in November our friends at  FINRA graciously offered to conduct testing for RIAs and administer a continuing education (CE) program “to ensure they are proficient in their field, and in the rules and regulations that apply to them.” Isn’t that just downright helpful of the Wall Street self-regulator that oversaw the mess which created the need for massive Wall Street financial services reform in the first place? Now they’re offering to work their magic on the independent advisor world as well. What could go wrong?

Of course, FINRA’s suggestion is far from surprising: Since advisor re-regulation was proposed by the Obama Administration some 18 months ago, FINRA has been angling to become the regulator of RIAs, too. Having apparently accepted a fiduciary duty as a fait accompli from nearly the beginning of the re-reg, FINRA has been anxiously trying to at least control this threat to the securities business as usual. The good news is that those attempts surprisingly seem to have been met with less than enthusiasm at the SEC.

So FINRA regrouped, and came out with a more modest proposal: “As we’re already in the business of broker testing, why don’t we just take over RIA testing as well?” Make no mistake: this new initiative is not at all an indication of capitulation. It’s just a smaller step toward the same goal of adding independent advisors to FINRA’s stable of regulation.

The not-so-good news is that, according to FINRA anyway, the testing proposal was put forward at the request of SEC staffers who wanted the broker regulator’s opinion about whether RIAs need testing. While it’s hard to tell how pervasive this kind of thinking might be at the SEC, the fact that anyone at the Commission is asking these kinds of questions, and looking to FINRA for the answers, isn’t encouraging to those of us who are hoping for a genuine client-centered standard for brokers.

The key to whether brokers end up with a true fiduciary duty lies largely with how the SEC frames the question. If the assumption is, as FINRA would have us believe, that we need to raise RIAs to the level of brokers, then FINRA would be just the helpful folks to do it, starting with testing, and ending with overall regulation.

After all, they already test and regulate many RIAs who have Series 65 and 66 securities licenses. But, of course, that’s just the problem: If FINRA was doing such a crackerjack job regulating broker/RIAs to look after the best interests of their clients, we wouldn’t need broker re-regulation in the first place. The fact that we do need re-regulation should disqualify FINRA from any such regulatory role, prima facie. And it should preclude the SEC from seeking FINRA’s advice about how to make it happen.

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