September 11th, 2011
Econintersect: The House proposed draft legislation Thursday (Sept. 8) that would allow one or more SROs (self-regulatory organizations) to oversee all investment advisers. The bill was trotted out by House Financial Services Committee Chairman Spencer Bacchus in advance of a Sept. 13 hearing to review provisions of Dodd-Frank that govern the regulation of broker/dealers and investment advisers. These include the SRO matter as well as whether to extend fiduciary duty to brokers and broker/dealers. Follow up:
Follow up:Today the SEC oversees and examines all investment advisers but only has sufficient resources to examine them once every nine years. In order for the SEC to transfer its examination power to an SRO, securities laws need to be amended. The possibility of using SROs to enforce consumer protection oversight was authorized by the Dodd-Frank act, the 2010 legislation which laid out the framework for financial regulatory reform. From Registered Rep magazine:
Under a Dodd-Frank mandated study released in January, the SEC recommended a number of options for enhancing the examination of investment advisers: The SEC could to continue to do the job, raising additional resources with self-funding; multiple SROs could oversee all investment advisers; or a single SRO could oversee dually registered investment advisers.
In the Sept. 13 hearing, examiners will ask witnesses about all three options, says Duane Thompson, of consulting firm Potomac Strategies and policy analyst for Fi360, a fiduciary training firm. But the Bacchus bill seems to have opted for option number 2, at least for now.
“A question for some of us was whether the bill would be more narrow in its scope, meaning it would only apply to dual registrants,” said Thomspon. “In this case, this is arguably an opening bid. I could see down the road, if this legislation ran into problems, presumably on the Senate, that could be a default—just dual registrants.”
The “dual registrants” language applies to individuals and firms that have the dual roles of providing financial advice and selling financial products such as insurance, stocks, bonds mutual funds and alternative investments.
Some financial products brokers do not represent themselves as investment or financial planners or managers. Some financial planners operate on a fee only basis for planning services and do not sell financial products. Neither of these categories would fall under the dual registration umbrella.
The September 13 hearings were scheduled in August and will accept testimony from interested parties. From Registered Rep:
The hearing will be held by the Financial Services Committee’s capital markets subcommittee, which is expected to review who should be responsible for enhanced examination of investment advisers--the SEC or an SRO (self-regulatory organization) like FINRA. Today investment advisers are examined by the SEC once every nine years, whereas broker/dealers are examined by FINRA once every three years.
FINRA has been vocal about wanting to assume the role of SRO for investment advisers. The investment adviser industry, however, worries FINRA has a broker/dealer bias and has called for the SEC continue to do the job. Currently, the SEC does not have enough funding.
FINRA is the Financial Industry Regulatory Authority and is the securities industry SRO. It is charged by its members with regulating the operation of the Broker-Dealers who provide retail investment products to customers. The members are the Broker-Dealers themselves.
The investment advisor industry referred to is represented by such organizations as the Financial Planning Association and the CFP Board, which licenses Certified Financial Planners ®. These organizations and others like them have established strict ethics principals that their members must adhere to in order to retain their membership. These ethics principals apply a strict code of fiduciary responsibility.
FINRA applies a much more lenient code of conduct known as “suitability” which falls far short of what is expected from a fiduciary.
Disclosure: The GEI Managing Editor has worked for twenty years in the financial services industry, 10 years as a Series 6, 7 and 63 registered representative of a NASD broker-dealer and, more recently, 10 years as a fee-only Certified Financial Planner ®. The NASD (National Association of Security Dealers) was the predecessor SRO to FINRA. This experience was drawn on to write the very leading headline for this news brief. It is the editor’s opinion that FINRA has a primary responsibility to protect its members from the misdeeds of individual member firms and individual representatives, and has only a secondary interest in protecting the public.
Note: The Wikipedia entry for FINRA was apparently entered by FINRA itself and carries a warning that the neutrality of the entry has been disputed.
Source: Registered Rep