Protests aside, SEC may give Finra oversight

If an anger management session had been on the schedule during the Financial Planning Association’s annual conference last week, it would have been standing room only.

To be sure, if you were looking to get a rise out of a financial adviser at the conference, all you had to do was ask how they felt about the prospect of Finra’s expanding its jurisdiction to include registered investment advisers.

They’re mad as heck, but there appears to be little they can do about this. The handwriting may already be on the wall.

The obvious constraints on the Securities and Exchange Commission’s budget and time, coupled with scores of studies and new responsibilities spawned by the Dodd-Frank Act, make it likely that the commission will cede oversight to Finra.

But that reality hasn’t stopped the protests.

“I had 500 or more advisers attend my presentation [at the FPA conference], and when I asked the audience, ’Who would be OK with Finra as your regulator?’ not one hand went up,” said Tom Bradley, president of TD Ameritrade Institutional. “I believe it stems from a distrust of the traditional broker-dealer sales model and anything affiliated with it, especially the regulator.”

After that session, I decided to take a walk around the convention center and conduct a sort of man-on-the-street poll. What I found was many very angry advisers.

‘ABSOLUTE INSANITY’

They feel that that the Financial Industry Regulatory Authority Inc. would truly be a bad choice to regulate advisers.

“It would be absolute insanity,” said one adviser, who has logged some 30 years in the business, and asked not to be identified. “My plan is to try and retire before that actually happens.”

The consensus from several industry officials at the FPA conference is that a combination of understaffing at the SEC and a ton of new responsibilities for the commission as part of the Dodd-Frank Act make it more likely than ever that advisers will be overseen by Finra.

Clearly, many advisers simply don’t want to accept that as a conclusion, and think that the SEC is still best-positioned to regulate and oversee the advisory profession.

I chatted with several fee-only advisers who were taking a break from sessions to enjoy a cup of coffee. They told me they fear that Finra’s rules-based approach to regulation would disrupt their business model.

“Jim, don’t use my name, OK?” one of the advisers requested. “I just want you to know that many advisers don’t want to be governed by Finra.”

The adviser, who has more than 20 years’ experience, said: “It really all comes down to this for me: Finra’s rule-based approach will not be able to adequately address the principle-based [RIA] business I operate in every day.”

Although many agreed that the SEC enforcement of advisers has proved inadequate, they still adamantly say that Finra oversight isn’t the best solution.

“The SEC better sharpen its pencil and come up with another plan that does not include Finra,” said one adviser, who asked not to be identified, as she doesn’t “want to deal with any trouble.”

Leaders of financial planning organizations also think that Finra’s rules-based approach wouldn’t be a good fit for fee-based financial advisers.

“The possibility of Finra oversight is absolutely a clear and present danger for the advisory profession,” said David Tittsworth, executive director of the Investment Adviser Association.

‘SERIOUS CONCERNS’

“We have serious concerns [over whether] Finra is right for the job,” said Kevin Keller, chief executive of the Certified Financial Planner Board of Standards Inc.

“As a self-regulatory membership organization of broker-dealers, it does not have a fundamental consumer protection mission,” he said. “With its focus on establishing rules for the sale of securities products, it lacks expertise and experience in enforcing the delivery of advice consistent with a principles-based, client-first standard of care.”

Jim Pavia is the editor of InvestmentNews.

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