Close Close

Regulation and Compliance > Federal Regulation > FINRA

The Most Effective and Cost-Efficient SRO for Advisors? FINRA

Your article was successfully shared with the contacts you provided.

Independent financial advisors are deeply committed to their clients and are proud of the level of service they provide. When a Main Street investor sits down to discuss his or her financial future with an advisor affiliated with an independent financial services firm, they can have confidence that the professional across the table has been examined on a regular basis by their broker-dealer compliance department, FINRA and the SEC. 

What many investors don’t realize, though, is that this level of examination doesn’t exist for all advisors offering that same advice.

This gap exists because, under current conditions, broker-dealer affiliated financial advisors and independent RIAs operate under a fragmented regulatory framework, with FINRA regulating broker-dealers and the SEC overseeing RIAs. The SEC lacks the resources to adequately oversee the RIA sector, as the agency concluded itself in a study it conducted under Dodd-Frank. As a result of this regulatory patchwork, RIAs are only examined, on average, once every 11 years; Here is another astounding statistic: according to the SEC, nearly 40% have never been examined at all.

The current fragmented system of oversight creates risks for Main Street investors that are clearly unacceptable. Fortunately, leaders in Congress and within our industry are aware of this problem, and are working toward a solution.

Dodd-Frank, as imperfect and, often, infuriating as it is, nonetheless mandated that the SEC study and make recommendations to Congress for reforming the current regulatory system to protect Main Street investors. In order to address that law, on April 25, House Financial Services Committee Chairman Spencer Bachus (R-Ala.) introduced legislation that would accomplish this vital goal by creating a self-regulatory organization (SRO) for RIAs. The legislation, if signed into law, would dramatically improve oversight for RIAs and ensure a much greater degree of consumer protection.

We applaud the bipartisan efforts of Chairman Bachus and the House Financial Services Committee to remedy this urgent regulatory imbalance. FSI has long called for a single SRO to oversee both the broker-dealer and RIA segments of the industry, as well as for a properly structured and uniform fiduciary standard. And our members agree: a recent FSI poll of over 2,000 financial advisors showed that roughly 75% of them favored an SRO for RIAs.

We believe that the best candidate to serve as the unified SRO for our industry is an established organization with a deep understanding of effective oversight. As FSI has said before, that organization is FINRA. While no regulator is perfect, and FSI fully understands the problems and our members’ frustrations with FINRA, the simple fact is, FINRA is in the strongest position to close this unacceptable regulatory gap, improve investor protection and establish an even playing field for all financial advisors.

FSI’s members and senior staff have maintained a strong and open dialogue with FINRA. The professionals there have been consistently receptive to our members’ feedback and have been willing to make changes in proposed regulations in response to our concerns. Our members are highly engaged with FINRA at the grass-roots level, as well: in January, 16 additional FSI members were elected to FINRA District Committees throughout the country.

While effectiveness is the key issue in determining the unified SRO for our industry, cost is also a critical consideration. In this area as well, FINRA represents the best option.

FINRA estimates its one-time startup costs to serve as the SRO for RIAs at approximately $12 million to $15 million, with ongoing annual costs of approximately $150 million to $155 million. These projections, compiled by experienced regulators with first-hand knowledge of the costs of running an SRO, are much lower than estimates from another source (that never even asked FINRA for input on its study), and reinforce FINRA’s position as the most appropriate organization to serve as the unified SRO for our industry. 

Consumers deserve much greater transparency than they currently receive when it comes to securing their financial futures. Main Street investors deserve a unified standard of oversight that provides necessary assurances of quality and compliance, enforced by a capable and experienced SRO: FINRA. 

Hard-working Americans do not have the time or the resources to determine on their own whether their financial advisor is receiving the proper oversight. Thanks to Chairman Bachus, the solution for this regulatory disparity is now on the table. We look forward to working with all of our members and leaders in Congress to make it a reality and then to hold FINRA accountable to deliver the best, most effective and least intrusive oversight of our members in the future. 


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.