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Regulation and Compliance > Federal Regulation > SEC

Unfinished Business: Advisors Debate Fiduciary Standard, SRO

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As we near the end of 2011, two of the top issues for the advisory industry remain unresolved: a fiduciary mandate for brokers and a self-regulatory organization (SRO) for advisors.

The consensus now is that the SEC won’t unveil a proposed fiduciary rule until sometime in 2012, and published reports have said Securities and Exchange Commission (SEC) Chairman Mary Schapiro—who’s been steadfast in her desire to put brokers under a fiduciary mandate—will be staying at her post for another year or more.

Since unveiling his draft SRO bill in early September, Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, and his staff have not only held a hearing to discuss the merits of the draft, but they’ve been deluged with visits from advisor and broker-dealer trade groups as well as consultants to the advisor community voicing their yeas and nays about the bill—like Brian Hamburger of MarketCounsel.

Hamburger, whose firm provides regulatory consulting services to advisors, met with Bachus and his staff twice in October over the SRO issue—once in Bachus’ home state and another time in Washington.

Hamburger told me after his last visit that Bachus and his staff have been receptive to visits from the advisory and BD industries and that during his visits, Bachus and his staff “stressed that what they sent was a draft [bill] and they weren’t resolved to this being the final bill.”

The Bigger the RIA, the More Scrutiny Needed

That’s good news for Hamburger’s clients, as he told Bachus and his team that an SRO would pose undue regulatory burdens on small and midsized advisors. Ninety percent of advisory firms manage less than $5 billion in total, Hamburger says, and manage only 10% of the assets overseen by RIAs. The vast majority of these firms, he says—which employ fewer than 50 people—would fall under an SRO’s oversight. On the other hand, 10% of advisory firms manage more than $5 billion in assets, and they oversee 90% of total assets overseen by RIAs. It’s these firms, he argues, that need the most scrutiny—not the smaller advisory firms.

It is precisely the small to midsized advisors “that have a struggle in getting their voices heard,” Hamburger says.

What’s more, Hamburger says, “there’s no real empirical evidence” that an SRO is needed. The SEC “suffers from dire mismanagement,” Hamburger said he told Bachus and his team, but “there’s nothing that backs up that the SEC needs more resources.” For instance, he questions why the SEC’s Office of Compliance Inspections and Examinations (OCIE) devotes resources to examining broker-dealers when that’s the Financial Industry Regulatory Authority’s (FINRA) job. OCIE “is pretty evenly split between advisor and BD oversight,” Hamburger says.

Steve Luparello, vice chairman of FINRA, backed up those statistics during the Financial Services Institute’s (FSI) annual advocacy summit in Washington in early October. He said that only 9% of SEC-registered investment advisors were examined in 2010. “At that rate, the average registered adviser could expect to be examined less than once every 11 years. FINRA and the SEC, by contrast, examine about 55% of broker-dealers each year.” FSI is in favor of FINRA becoming the SRO for advisors and, along with 150 of its members, took that message to more than 260 lawmakers at its October event.

SEC Path of ‘Least Resistance’: FINRA

But for all the wrangling advisor advocates have had with lawmakers over the SRO issue, Hamburger says that discussions he’s had with SEC staff—including the commissioners—leads him to believe the SEC wants to take “the path of least resistance” and appoint FINRA as the SRO for advisors. This, he says, would free up resources for the agency.

Another sign that the SEC is caving to FINRA as the SRO is SEC Chairman Schapiro’s admission during her recent testimony before Congress that an SRO for advisors should be seriously considered.

Broker-dealers are pushing hard for an SRO for advisors because advisors are pushing hard to make sure the SEC makes them adhere to a fiduciary standard of care, Hamburger says.

During his address at the FSI event in Washington in October, FINRA’s Luparello also addressed “concerns” expressed by the advisor community—particularly those entities not affiliated with a broker-dealer—who have “consistently opposed the SRO concept, and especially FINRA as that SRO.”

These advisors, he said, “have mounted a campaign that is focused on the premise that the SEC should receive the necessary funding from Congress to comprehensively regulate investment advisors.” However, the reality of that happening, he said, “is unlikely.”

Whenever the discussion moves to whether FINRA should be the SRO for investment advisors, “the talking points in opposition,” Luparello said, are that “FINRA is not qualified because it only regulates broker-dealers and therefore doesn’t understand the differences between the two models.” Advisors, he said, believe they would be “forced to live under a broker-dealer regime. That’s simply wrong.”

FINRA, he continued, accepts “that there are important differences between broker-dealers and investment advisers.” Any entity that would be empowered to oversee advisors, he said, “would need to recognize that and regulate accordingly—and FINRA most certainly would.”

But even if the House were to pass SRO legislation this year, the bill looks to be a tough sell in the democratically controlled Senate. As a spokesperson for Senator Tim Johnson, D-S.D., chairman of the Senate Banking Committee, told me recently, Johnson believes the SRO issue “deserves further exploration before moving forward with any legislative proposals.”

Duane Thompson, senior policy analyst at fi360, said recently that while he doesn’t see an SRO bill passing in this Congress, if a bill does make it out of the next Congress, it could include compromises that have been hashed out by the House and Senate. His advice for those eagerly awaiting an SRO outcome: “Wait until after the 2012 election.”


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