RIAs fretful about Finra grabbing regulatory oversight

The nomination of Financial Industry Regulatory Authority Inc. chief Mary Schapiro to head the Securities and Exchange Commission has intensified worries about whether Finra will take over the regulation of financial advisers.
She has in the past suggested that advisers should be subject to a self-regulatory regime similar to that of the securities industry.
Furthermore, the scandal involving Bernard Madoff is likely to provide additional impetus for the increased oversight of advisers.
“We knew based on the crisis that Congress was going to do something” related to regulatory reform, said David Tittsworth, executive director of the Investment Adviser Association in Washington, which represents institutional advisers. “Now, with Madoff and Mary Schapiro’s ties to Finra, these [adviser regulation] issues are definitely on the table.”
An SRO for advisers has been hotly debated in the past, and the advisory industry isn’t necessarily opposed to the idea. But having New York- and Washington-based Finra regulate advisers is “an idea we have consistently opposed,” Mr. Tittsworth said.
Finra “would not be a good fit” to regulate advisers, said Diahann Lassus, chairwoman of the National Association of Personal Financial Advisors in Arlington Heights, Ill. She is president of Lassus Wherley & Associates PC, an investment advisory firm in New Providence, N.J., that has $300 million under management.
BROKER CONFLICTS
Advisers say that Wall Street is littered with conflicts that, though not necessarily illegal, tend to be poorly disclosed. They think securities regulators are ill-equipped to enforce a fiduciary level of disclosure and conflict management. Being a fiduciary means more than “just running a marketing piece by a compliance officer,” said Tom Orecchio, a partner at the advisory firm Greenbaum and Orecchio Inc. in Old Tappan, N.J., which manages about $400 million.
Mr. Orecchio, a NAPFA member, has also been a broker.
Advisers worry that if Finra regulates advisers, it would adopt prescriptive rules that are better designed for brokers.
Brokerage firms themselves have long complained about burdensome rules that do little to protect investors and a “gotcha” attitude by Finra for minor rule violations.
Advisers have a legitimate concern about Finra’s cracking down on them, said Jed Bandes, president of Mutual Trust Company of America Securities Inc., a Clearwater, Fla.-based brokerage firm, and a frequent critic of the regulator.
Finra has been “licking its chops over that [potential] fee revenue from advisers for a long time,” he said.
“Mary Schapiro will shock the advisory world by making everyone get a Series 7 or something to prove they know what they are doing,” said Kirk Francis, chief executive of Cross Financial Services, a San Antonio, Texas, firm that manages about $85 million in assets. “The RIA world at the end of the day is woefully unaccountable and there is not much of a barrier to entry, but I don’t know that registration is the right answer.”
Adviser groups hope that Ms. Schapiro won’t hold onto any preconceived notions about adviser regulation.
“You hope she is the kind of person who will exercise independent judgment,” Mr. Tittsworth said. “There’s a difference between chairing the SEC and being head of Finra, and I think she knows that.”
Finra spokeswoman Nancy Condon declined to comment.
Clearly, Finra, Ms. Schapiro and the brokerage industry think that advisers are under-regulated. In a December 2007 comment letter to the Department of the Treasury, she extolled the virtues of self-regulation and suggested that retail investment advisers and the insurance industry should also be subject to oversight by an SRO.
The Treasury didn’t mention SROs in its October 2007 request for comment on regulatory reform, “but lo and behold, [the idea of an SRO for advisers] showed up in the [final Treasury] blueprint” for reform, Mr. Tittsworth said.
The March 2008 blueprint recommended that investment advisers be subject to an SRO regime similar to that of broker-dealers.
Such a regime “would enhance investor protection and be more cost-effective than direct SEC regulation,” according to the blueprint.
FINRA ADVOCATE
At the SEC, Ms. Schapiro will have at least one ally likely to push for more adviser regulation: SEC commissioner Elisse Walter, a former Finra executive vice president who became an SEC commissioner in July.
By contrast to advisers’ fiduciary standards, “SEC and NASD rules provide much better assurance that brokerage customers will be protected,” Ms. Walter wrote in an April 2005 comment letter to the SEC.
Fiduciary duty “cannot afford retail investors with the same level of protection as the explicit regulatory standards governing the conduct of business as a broker-dealer,” she wrote.
Because Finra thinks that its standards are superior to adviser rules, an advisory oversight group within the SRO would be hard-pressed to operate independently, Ms. Lassus said.
Advisers also question the adequacy of Finra regulation in the wake of numerous failures of the large Wall Street firms, and now, the Madoff scandal.
Mr. Madoff’s hedge fund assets were held in custody by his brokerage firm, Bernard L. Madoff Investment Securities LLC of New York, and he was paid through trading commissions rather than management fees.
The Securities Investor Protection Corp. of Washington is liquidating the brokerage firm.
SIPC chief executive Stephen Harbeck has said that the company’s records are in disarray and that customer statements don’t reflect the firm’s actual positions.
A range of regulatory issues need to be looked at in any reform efforts, including the adequacy of broker-dealer regulation, Ms. Lassus said.
E-mail Dan Jamieson at [email protected].

Related Topics: Financial Industry Regulatory Authority