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Talk of FINRA as Advisor SRO Rears Its Head Again

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Rep. French Hill, R-Ark., a member of the House Financial Services Committee, said Thursday that he plans “to explore” introducing a bill that would give the Financial Industry Regulatory Authority the authority to examine investment advisors.

When asked by an audience member after his remarks at FINRA’s annual conference in Washington on Thursday morning about the current exam rate of investment advisors by the Securities and Exchange Commission, Hill stated that the current 10% annual exam rate is “a low number,” and that he thinks FINRA “should have the responsibility” of examining advisors.

FINRA has “an excellent network of offices [and] they know how to do exams,” he said.

Hill told reporters after his remarks that he would “support” legislation giving FINRA exam authority over advisors and that he would “explore” such a measure.

He said that such a bill would “expand the scope” of FINRA’s oversight, including considering FINRA as a third-party examiner of advisors, adding that FINRA would be a “natural” fit to assume such a role, instead of creating a separate self-regulatory organization.

A FINRA spokesperson told ThinkAdvisor that “as we have stated previously, FINRA continues to believe that the current levels of investment advisor oversight and examinations are unacceptable and a risk to investors, and that this significant gap in investor protection needs to be addressed sooner rather than later.”

Securities and Exchange Commission Chairwoman Mary Jo White said in early April that the agency will be “discussing advancing” a rulemaking this year to require third-party advisor exams.

However, while White told Congress in late March that the SEC staff will be developing a rule proposal to require third-party exams for advisors, she said that such exams were “not an optimal place to go.”

Investment advisory as well as consumer trade groups have complained that third-party exams could prove costly for smaller firms and could open the door for FINRA to assume advisor exam authority.  

Neil Simon, vice president for government relations at the Investment Adviser Association in Washington, told ThinkAdvisor in a Thursday email message that “while it is incumbent upon the SEC to reallocate its existing resources and use them more efficiently, the IAA remains convinced that Congress should either increase the SEC’s appropriation or permit the agency to levy reasonable user fees upon registered advisors dedicated to increasing the SEC’s examination program.”

IAA “strongly opposes the SRO model that FINRA has advocated for investment advisors,” as “it would impose an unnecessary new layer of regulation and bureaucracy on advisors far beyond what is necessary to increase examinations, while introducing all of the other drawbacks of an SRO – inherent conflicts of interest arising from industry funding and influence; questions regarding transparency, accountability, track record and appropriate oversight by the SEC and Congress; and lack of due process.”

But the user-fees concept has not garnered much support on Capitol Hill. Simon said that IAA “expects to meet with Rep. Hill shortly to discuss these issues.”

IAA’s Simon also told compliance officers in early March that FINRA has not “surrendered its long-held goal of assuming responsibility for advisors.”

Hill is also a co-sponsor of Rep. Ann Wagner’s Retail Investor Protection Act (H.R. 2374), which Wagner reintroduced in late February requiring the Department of Labor to wait to repropose its fiduciary rule until the Securities and Exchange Commission issues its own fiduciary rulemaking.

When asked about the progress of Wagner’s bill during the FINRA meeting, Hill noted the “slow” legislative process and stated that consideration of the bill isn’t “on a fast track” but that co-sponsors of the bill are “urging consideration and bipartisan support” for it.

Hill, a former commercial banker and investment manager in Little Rock who began his first congressional term on Jan. 3, also complained that the “overly burdensome” Dodd-Frank Act has “exacerbated” the increasing demise of small broker-dealers.  

“We are losing small BD firms like we are losing small banks,” he told FINRA attendees.

Citing FINRA stats, he said the number of broker-dealer firms has decreased from 5,191 in 2004 to 4,578 in 2010 and 4,040 as of April 2015.

“Just like small banks, small broker-dealers can least afford compliance costs of additional regulation,” Hill said. “This is despite the burden being shouldered by the clearing firms and their technology for the benefit of introducing brokers.”

While small firms were previously exempted, Dodd-Frank requires all broker-dealers to be audited by an auditor registered with the Public Company Accounting Oversight Board, “whether the broker-dealer is public or not. Many small BDs struggle to find PCAOB-registered auditors, and when they do, the annual costs are exponentially higher.” Also, he said, “occasionally, actually two public accounting firms are needed to accomplish various requirements — with the obvious increase in costs.”

Broker-dealer registration, he continued, “is very expensive from a compliance perspective.” He cited FINRA’s Comprehensive Automated Risk Data System (CARDS) proposal, which Hill said would be “costly, intrusive and overly burdensome,” as well as DOL’s fiduciary rule.

Hill added that “many BDs are dropping their registrations and becoming RIAs,” due to the fact that the SEC examines only about 10% of advisors annually.

— Check out FINRA’s Ketchum Blasts DOL Fiduciary Plan; White House Says ‘Work With Us’ on ThinkAdvisor.


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