FINRA Makes Bid for Fiduciary Control

Econintersect:  Just days after House Financial Services Chairman Spencer Bachus, R-Ala., introduced draft legislation calling for one or more self-regulatory organizations (SROs) for advisors, Rick Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA), told lawmakers at a Tuesday hearing to discuss the draft bill that FINRA stands ready to take on that role.

GEI News made an editorial comment on the proposal a few days ago, calling it a proposal “to have the fox guard the hen house.” In testimony before the House Financial Services Capital Markets Subcommittee, Ketchum (left) said that FINRA, as the advisor SRO, would establish “a separate entity with separate board and committee governance to oversee any advisor work, and would plan to hire additional staff with expertise and leadership in the adviser area.” What’s more, he pledged, “if FINRA becomes an SRO for investment advisers, we would implement regulatory oversight that is tailored to the particular characteristics of the investment advisor business.”

Ketchum went on to say that given FINRA’s “experience in operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem.”

Not all who testified agreed with the FINRA proposal.  David Tittsworth, executive director of the Investment Adviser Association in Washington (IAA), however, stated IAA’s “strong” opposition to an SRO for the advisory profession—particularly FINRA—as “substantial drawbacks to an SRO outweigh any potential benefits.” These drawbacks, he said, include “insufficient transparency, accountability, and oversight by the SEC and Congress, due process issues in disciplinary proceedings, and the absence of any requirement for a cost-benefit analysis for proposed rules.”

Tittsworth told members of the subcommittee that IAA would assist the subcommittee in drafting, as an alternative to an SRO, legislation calling for properly structured user fees. Tittsworth said such a bill should include provisions that: (1) specifically preclude any investment advisor SRO if such fees are imposed; (2) clarify that such user fees will be dedicated to an increased level of investment advisor examinations (instead of simply being used as substitute funding for the existing level of examinations); and (3) set forth specific reporting requirements and review of any such user fees by Congress and the public.

Some organizations of financial planners (The Financial Planning Association and The Certified Financial Planner® Board) have argued that the SEC (Securities and Exchange Commission) should continue to supervise financial planners who operate as investment advisors.  There has been opposition to that by some (including Rep. Scott Garrett, R-N.J., chairman of the subcommittee) on the grounds an SRO is needed for advisors because the SEC is not funded and staffed to do the job.

Ketcham said, in answer to a question from Rep. Baucus, that FINRA would be willing to accept enhanced oversight of their regulatory operation by the SEC.

Garrett expressed his concern (which he had voiced before) that proposals for oversight being drafted by the SEC did not contain any cost/benefit analysis of the regulatory efforts.  Garrett has said in the past that the SEC would be making choices in just whose interests they were protecting when enforcing fiduciary responsibility rules.

Editors note: There is little question whose interests FINRA represents.  Their members are the broker-dealers who sell securities.

Sources:  AdvisorOne and GEI News