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Ketchum to SEC: Finra can oversee advisers

Self-regulator would set up separate affiliate to monitor FAs, dramatically increase frquency of exams

In a comment letter posted to the SEC website yesterday, Richard Ketchum, chief executive of the Financial Industry Regulatory Authority Inc., laid out in some detail what a self-regulatory organization for advisers might look like. Mr. Ketchum wrote that the SEC was probably not suited to do the job – but Finra itself is.
Due to the Securities and Exchange Commission’s “intractable resource problem, we recommend that the Commission seek authority to establish one or more self-regulatory organizations for investment advisers,” Mr. Ketchum wrote in his letter, which is dated Nov. 2.
“If Finra were to seek authorization as an investment-adviser SRO, we would create a separate affiliate, with is own board of governors, to ensure that the SRO establishes programs appropriate to the adviser industry,” Mr. Ketchum wrote.
An adviser SRO should be “subject to exacting requirements” to ensure it is accountable, transparent and “free of undue industry influence,” Mr. Ketchum wrote, and should have a board with a majority of public members. Members from the adviser industry would make up a “substantial portion” of the remaining seats.
The adviser SRO should also have an independent staff and enforcement department like Finra has now, he said.
The new private regulator for advisers should be given “some rulemaking authority,” Mr. Ketchum said in the letter, the extent of which would be determined by the SEC. It should have authority to enforce its own rules, the Investment Advisers Act of 1940 and rules under the act, he said.
But “Finra does not believe that it would be appropriate … to impose a broker-dealer-like regulatory regime on investment advisers,” Mr. Ketchum added.
The main problem with adviser oversight is “lack of examination resources,” he said.
Adding an SRO to the mix “would help ensure a dramatic increase in the frequency of examinations and resources devoted to enforcement,” he said in the letter.
Finra is clearly lobbying to take on the SRO role, said David Tittsworth, executive director of the Investment Adviser Association, which opposes Finra as a regulator.
“This letter lays it to rest if anyone had any doubts” about what Finra is doing, he said.
Finra spokeswoman Nancy Condon declined comment.
The IAA, along with the Investment Company Institute and the Managed Funds Association — which represent the mutual fund and alternative-investment industries, respectively — opposes the idea of an adviser SRO and instead wants the SEC to get more resources to beef up its adviser exam program.
Adviser oversight “should be conducted by an independent government agency directly accountable to Congress and the public,” the ICI said in a comment letter last month.
The Dodd-Frank legislation requires the SEC to report to Congress by January the results of a study on enhancing adviser exams, and whether it needs authority to create an SRO for advisers. The commission has been taking comments on the provision.
Authority to create an adviser SRO would require Congressional action.