War of ‘independence’
As the debate over a bill that would shift oversight of investment advisers from the Securities and Exchange…
As the debate over a bill that would shift oversight of investment advisers from the Securities and Exchange Commission to an industry group continues, an effort to change the definition of a self-regulatory organization has some in the industry rolling their eyes.
Lobbying on behalf of the legislation is focusing in part on portraying the Financial Industry Regulatory Authority Inc., the SRO for brokers, as an “independent regulator.”
Finra is the biggest backer of the bill and is angling to become the adviser SRO — a prospect that makes many advisers nervous.
“My great fear of the SRO debate is that it’s going to be decided by people who have either been unwilling or unable to understand who Finra is, who they represent and the conflicts of interest they have,” said David Mendels, director of planning at Creative Financial Concepts LLC. “[Independence] sounds good, but it’s inherently impossible for Finra to do that.”
In order to ease suspicion that self-regulation is akin to the fox watching the henhouse, proponents of the bill are touting the fact that the majority of governors on Finra’s board are public representatives.
Finra’s self-description as “the largest independent regulator for all securities firms doing business in the United States” is gaining traction, at least in some quarters. The Washington Post called Finra the largest independent securities regulator in an article last month.
The renovation of the term “SRO” could be important to the fate of the bill introduced by House Financial Services Committee Chairman Spencer Bachus, R-Ala., that would establish one or more SROs for advisers. He contends that his measure would strengthen investor protection by increasing the number of advisers subjected to annual exams. The SEC has acknowledged that it lacks the resources to examine more than a fraction of the advisers in the U.S. annually.
Finra insists that it has no ulterior motive in calling itself independent and has been doing so for years. Finra’s board comprises 11 public members, 10 industry members and its chief executive, Richard G. Ketchum.
The two newest public governors were appointed last week: Richard S. Pechter, former chief executive of Donaldson Lufkin & Jenrette Inc., and Joel Seligman, president of the University of Rochester.
The public majority doesn’t reassure Tom Ajamie, a managing partner at Ajamie LLP, who represents investors in Finra arbitration proceedings.
Industry ties
“It’s not an independent board,” he said. “It’s dominated by people who are of the industry or have ties to the industry or who think like the industry.”
David Tittsworth, executive director of the Investment Adviser Association, also is unconvinced.
“You can call them independent, an SRO, a widget, a duck, whatever,” he said.
“Ultimately, what you want is a regulator that’s accountable, that’s transparent, that’s effective and efficient. To me, Finra doesn’t pass any of those tests,” Mr. Tittsworth said.
Finra spokeswoman Nancy Condon disagrees.
“Finra takes its role as an independent regulator and its mission of investor protection very seriously,” she wrote in an e-mail
“The organization is governed by a board that is majority public and has a professional staff of more than 3,300 people autonomous from the industry it regulates. The work of our enforcement, fraud detection and revamped firm examination divisions are testaments to our focus on ensuring the industry abides by the rules,” Ms. Condon wrote.
The rhetorical tide took a significant turn at a June 6 hearing on Mr. Bachus’ SRO bill.
Chet Helck, chief executive of the global-private-client group at Raymond James Financial Inc., said that “SRO” is a misnomer.
“After many decades of legislation, oversight and regulation, regulatory organizations like Finra are not controlled, or unduly influenced, by the industry they regulate,” he said in prepared testimony. “On the contrary, today, regulatory organizations like Finra are widely viewed and respected as independent, self-funded organizations whose priority is to protect investors.”
In his appearance at the hearing, Dale Brown, chief executive of the Financial Services Institute, tried to refute the notion that an SRO for advisers would be weak and ineffective. The FSI supports having Finra assume that role.
“The industry has input and influence, but the industry does not control Finra and, therefore, doesn’t regulate itself,” Mr. Brown said.
He makes that point in his visits with lawmakers and their staffs.
“There’s not a thorough understanding of the role of Finra as an independent industry organization,” Mr. Brown said. “It’s an important part of our effort to educate Congress on this problem of solving insufficient oversight of investment advisers.”
Peter Chepucavage, general counsel at Plexus Consulting Group LLC, said that Finra has made strides toward independence but has further to go.
“They are more independent than they used to be because of more public directors,” he wrote in an e-mail. “But if they truly wanted to be independent, the board would have a lot more [public] directors from the issuer, legal and perhaps nonprofit sides. Independence is relative.”
When Finra celebrated its fifth anniversary on July 30, the organization made efforts to highlight its independence by illuminating its enforcement efforts.
“We formed a single, streamlined exam program that is more efficient and effective than it was five years ago,” Mr. Ketchum said in a statement. “By focusing more of our efforts on areas posing the greatest risk to investors, we have been able to create a culture in the organization to more quickly identify and respond to fraud and other serious misconduct.”
A recent analysis by Sutherland Asbill & Brennan LLP shows that Finra is on pace to increase the total amount of fines that it levies this year to $78.4 million, from $68 million in 2011, a 15% increase.
“There may be somewhat of a push to be a more aggressive regulator to better position themselves as the SRO for investment advisers,” said Brian Rubin, a Sutherland partner and a former chief counsel for enforcement at Finra’s predecessor, NASD.
Flexing enforcement muscle, while portraying itself as an independent regulator, could help Finra make its case to become the next adviser SRO — or whatever it might be called.
@markschoeff
“There’s not a thorough understanding of the role of Finra as an independent industry organization.”
Dale Brown
Chief executive
Financial Services Institute
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