FINRA, the self-regulator for broker-dealers (BDs) has said it wants to regulate RIAs as well, particularly because the majority of RIAs are part of BDs—the “dually registered” BD-RIAs. That’s a concern for FINRA because currently they regulate the BD side and not the RIA side of the “house.”
One issue is that activities on the RIA side of the dual registrants could fall through the cracks, as it is widely acknowledged that the SEC does not have enough funding to examine the activities of RIA firms as often as FINRA examines BDs. The SEC Study on Enhancing Investment Adviser Examinations said that currently it has the resources to routinely examine RIA firms—those that are not deemed high risk—every 11 years.
Many RIAs, particularly among the 35,000 independent RIA firms that are not affiliated with BDs, would rather see a properly funded the SEC provide RIA oversight—and they acknowledge that would mean regular exams.
In the AdvisorOne Top Wealth Managers Quarterly Pulse survey, fielded in February-March 2011, we asked independent RIA firms to consider the SEC’s three recommendations, which were:
- “Authorize the Commission to impose user fees on SEC-registered investment advisers to fund their examinations by OCIE;
- Authorize one or more SROs to examine, subject to SEC oversight, all SEC-registered investment advisers; or
- Authorize FINRA to examine dual registrants for compliance with the Advisers Act.”
Of the 162 independent RIAs participating in the AdvisorOne Top Wealth Managers Quarterly Pulse Survey, 40% preferred the first option—SEC OCIE Examinations funded by user fees; 30% preferred the second option, authorizing “one or more SROs to examine…all SEC-registered” RIAs; and 28% preferred that dual-registrants be subject to FINRA examinations “for compliance with the” Investment Advisers Act of 1940.
Other than FINRA, one other organization has announced that it wants to be authorized as an SRO for RIAs: the Self-Regulatory Organization for Independent Investment Advisers (SROIIA), announced last month by law students of investor advocate and University of Mississippi School of Law Professor Mercer Bullard (left). The Committee for the Fiduciary Standard on Monday announced its support for SROIIA, if the SEC does not get the necessary funding to continue to regulate RIAs. This editor is a member of the Committee.