Power play: Advisory industry pressing to halt expansion of Finra’s oversight

Opposition is mounting to proposed legislation — which is scheduled for a vote in the House tomorrow — that would harmonize regulations governing broker-dealers and investment advisers.

Seven groups representing financial planners and advisers, state securities regulators and the Financial Services Institute Inc. have already come forward to formally voice their opposition to an amendment to the Investor Protection Act that was approved last week — an amendment that would permit the Securities and Exchange Commission to delegate responsibility for regulating much of the investment advisory business to the Financial Industry Regulatory Authority Inc.

The Financial Planning Association, the National Association of Personal Financial Advisors, the Certified Financial Planner Board of Standards Inc., the IAA, the Consumer Federation of America, and Shareowners.org — a group of long-term investors that includes unions and shareholder activists — yesterday wrote a letter to the House Financial Services Committee calling for changes to be made to the bill.

The amendment, sponsored by Financial Services Committee Ranking Member Spencer Bachus, R-Ala., could give Finra the authority to regulate the investment advisory businesses of dually registered firms, as well as investment advisory firms and reps that are associated with brokerage firms. In total, that could cover about 25% of all investment advisory firms, managing nearly 80% of investment advisory assets, according to an analysis by the Investment Adviser Association.

The groups were particularly critical of the possibility of enlarging Finra’s jurisdiction over investment advisers. “For years, Finra and its predecessor organization, NASD Regulation, have sided with brokers in opposing efforts to hold brokers to a fiduciary standard when they provide investment advice,” the letter said.

Under the amendment, “Finra could become the main arbiter of how the fiduciary duty is applied to conduct by brokers, SEC-registered advisers with broker-dealer affiliates, and most financial planners,” the letter from the financial planning groups continued.

State securities regulators have also threatened to withdraw support for the bill. Amendments added to the bill “will narrow the application of the [fiduciary] standard and may very well erode this critical element of investor protection,” the North American Securities Administrators Association Inc. said in a separate letter it sent to the Financial Services Committee.

“Our support of the IPA [Investor Protection Act] is tempered by our serious concern with the committee’s adoption and consideration of amendments that will not serve investors,” said the letter, signed by Texas Securities Commissioner Denise Voigt Crawford, president of NASAA.

The Financial Services Institute Inc., which represents 115 brokerage firms — most of which are dually registered as investment advisory firms — has also voiced its opposition to the Bachus amendment.

“We have significant concerns with this proposal,” David Bellaire, general counsel and director of government affairs for FSI, said in an interview. “They have increased the regulatory burden on [dually-registered] firms, where the supervision was already quite substantial, and they’ve done nothing to address the real regulatory gap that exists over investment advisory firms.”

Finra defended the Bachus amendment. It would allow Finra “to put more boots on the ground, subject to SEC oversight, for those firms already regulated by Finra and their associated persons,” Finra spokeswoman Nancy Condon wrote in an e-mail.

“It is disappointing, but not surprising, that industry groups oppose more frequent examination of their firms,” Ms. Condon wrote. The SEC expects to examine only 9% of the investment advisory firms it regulates this year, she noted, while Finra inspects 55% of the brokerage firms it regulates.
Even as advisory groups pushed to prevent Finra from regulating the advisory industry, some brokers say Finra regulation makes sense for firms that are either dually registered or associated with brokerage firms.
“Finra already audits my broker-dealer,” said Paul Mendelsohn, president of Windham Financial Services Inc., a dually registered firm that manages about $28.7 million. “I would just as soon have one regulator to deal with, as opposed to having Finra audit my broker-dealer and the SEC audit my registered investment advisory side.”
Finra should be able to regulate individuals associated with brokerage firms “to the full extent of Finra regulations,” said Jim Dowd, president of fee-only advisory firm North Capital Inc., which manages about $10 million.

If Finra had control over all financial professionals at broker-dealers and associated firms, the SRO would have been better able to ensure that representatives follow appropriate regulations, he said. “It clarifies the regulatory lines.”