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July 20, 2011 at 07:14 AM
On the one-year anniversary of the Dodd-Frank Wall Street Reform Act, signed into law on July 21, 2010, let’s take a step back and review where we are vis-à-vis the reregulation of financial advisors. Although we don’t have nearly as much certainty about what the advisory industry will eventually look like as we hoped 12 months ago, happily, we do know (or can reasonably infer) quite a bit.
Fiduciary Standard & Harmonization
For instance, based on comments from parties on all sides of the issue, it seems very likely that we will have a “fiduciary standard” for brokers—however, what that standard will look like, and whether it will bear any resemblance to the duty of care that the clients of RIAs currently enjoy under the ‘40s Act is still up in the air.
We do know, if the latest SEC statements are to be believed, that any new standard for brokers will not be linked to efforts to “harmonize” the regulation of brokers and RIAs: a thorny issue that will apparently be left for another time. This is temporarily good news for RIAs, who have benefited from the standards-based oversight of the SEC and the courts. But long term, it may not bode well, as “harmonization” discussions so far have tended to suggest a far more burdensome “rules-based” system, such as FINRA currently uses for brokers.
Prospects for an SRO for Advisors
Perhaps the most unexpected development since the passing of Dodd-Frank is the possibility of a self-regulatory organization (SRO) for investment advisors, which among many other benefits would have the potential to avoid a rules-based bureaucratic and financial nightmare. At first, it appeared that the task of administering new RIA regulations would either continue to fall on the SEC, or be shifted to a more-than-willing FINRA (an outcome that by my reckoning, few observers, and even fewer RIAs, support). But when the prospect of additional funding for the SEC to ramp up its oversight began to dim in Congress, the possibility of a third alternative—an SRO for RIAs—began to emerge.
The first step toward an alternative solution was the announcement by The Business Law Society of its intent to create the Self-Regulatory Organization for Independent Investment Advisors (SROIIA), led by Professor Mercer Bullard and his law students at the University of Mississippi. Once the SEC (or Congress) announces its intention to seek an SRO for RIAs, SROIIA intends to file an application to fill the void for the 34,000 or so independent RIAs (and the 17,000 or so RIA reps employed by them). Starting an SRO from scratch is no simple undertaking, but as an alternative to FINRA oversight, I’d bet most RIAs will be willing to make the effort.
