Taking time out over the holidays to reflect on the past year has become one of my favorite exercises. It helps to bring recent events into sharper focus and to better anticipate what the new year might hold. On a macro level, certainly the presidential election was the biggest event of 2012. Yet, there’s very little left to say about it other than: Let’s hope the slim majority of Americans know what they’re doing.
On the independent advisory front, the story of the year has to be the non-story of the SRO that didn’t happen—yet. While the future of advisor regulation is anything but certain, it seems as if the Pickett’s Charge of FINRA trying to envelope RIAs into its regulatory ranks may have reached its high-water mark a bit short of its intended goal, just as Lee’s army did in Pennslyvania 150 years ago. It’s a turn of events that could afford independent advisors a brighter future than what was once considered the more likely alternative: a slow death at the hands of the FINRA bureaucracy, which has been one of the securities industry’s goals at least since FINRA’s predecessor, the NASD, tried to capture independent financial planners back in 1985.
FINRA’s congressional campaign was dealt a major setback this fall when term limits ended Spencer Bachus’ chairmanship of the House Financial Services Committee. Bachus, R-Ala., you may remember, is the sponsor of bill H.R. 4624, which calls for an SRO for RIAs, and he strongly supported FINRA to fill that role. Now, Rep. Jeb Hensarling, R-Texas, who is Bachus’ heir-apparent, is rumored to be less than enamored with Bachus’ SRO bill, which may not bode well for FINRA.
At the same time, in what (at least to this observer) appears to be an unprecedented act of political savvy, the Coalition for Financial Planning, which comprises the CFP Board, the FPA and NAPFA, is attempting to exploit FINRA’s weakened position on the Financial Services Committee. Melanie Waddell, Washington bureau chief for Investment Advisor, originally reported in November that the Coalition is pushing for a bill in the Democratic-controlled Senate that would support the SEC continuing to regulate RIAs, with the authority to collect user fees to fund it (see “To Thwart SRO Bill, Coalition is Pressing for Senate User Fees Bill,” AdvisorOne.com). The Coalition’s strategy seems to be that presented with a bipartisan Senate SRO bill, the dwindling support for the Bachus bill in the House may evaporate altogether, leaving the SEC in charge of investment advisor regulation.
Of course, regulation by either FINRA or the SEC is a far cry from self-regulation for RIAs. The SEC retains close ties to the securities industry SRO, with many former FINRA executives and staffers filling key roles at the Commission, including outgoing Chairman Mary Schapiro, and Commissioner Elisse Walter, who will fill Schapiro’s spot for at least a year. Consequently, despite its mandate to protect financial consumers, the SEC often exhibits a disturbing tilt toward the brokerage business model.
Still, the SEC would be a distinctly better regulator for independent RIAs than FINRA. For one thing, historically at least two of the five SEC commissioners are not openly pro-Wall Street, adding an important balance as the Commission traditionally tries to achieve a consensus on its more important decisions. What’s more, for political reasons, the SEC strives to maintain, at a minimum, the semblance of impartiality (I believe the current catchphrase for this is “business model neutrality”) in the actions it takes.