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Largest custodian opposes FINRA on heavily lobbied issue
January 14, 2011 — 3:09 PM UTC by Elizabeth MacBride
Schwab Advisor Services took a prominent public stand opposing an SRO for advisors in a statement posted on its web site yesterday. The short paper also reinforced its endorsement of a “best-interest” fiduciary standard for advisors and brokers.
Both the SRO and fiduciary issues – now being studied by the SEC — are delicate ones for the largest custodian, which is a subsidiary of a diversified financial services company that includes a brokerage overseen by FINRA. FINRA has been pushing hard to become the SRO of investment advisors.
Industry observers had noticed that until now, Schwab had been noticeably quiet on the question of an SRO for advisors.
“The custodians basically see [the outcome of FINRA as the new regulator] as a fait accompli so the argument to go out and advocate against an SRO is weak and the argument to go out and do it publicly is even weaker,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard, in an interview a few months ago.
TD Ameritrade had been the exception among the custodians.
Fidelity came under fire a few months ago at a MarketCounsel conference, where an advisor quizzed Fidelity Institutional Wealth Services president Mike Durbin on the company’s quiet approach to lobbying on the issue. (See: Custodians defend their records in having RIA backs in battles for the fiduciary standard and against FINRA takeover).
At the time Durbin, said, “We are engaged and engaged is the operative word…the question is how effectual we’re going to be. We’re doing our best to try to mitigate it.”
Fidelity did not provide additional comments on the topic if an SRO by the time this story was posted.
The SEC is due to release its SRO study today or next week; the study on harmonizing regulations between brokers and advisors is due by next Friday.It’s likely too late for Schwab’s stance to influence the studies themselves, so it’s not exactly clear exactly what spurred Schwab to take the public stand now.
“Industry associations have been issuing statements and comment letters in favor of an SRO for advisor. ... We wanted to be sure that RIAs were aware of this matter and to share why Schwab is not in favor of an SRO model for advisors,” said Lindsay Tiles, director of corporate public relations for the company.
Yesterday, SIFMA filed a letter in support of an SRO for retail investment advisors, not institutional ones (the letter is excerpted below).
Establishing an SRO for advisors would require Congressional action – in fact, some organizations had already begun prepping for the battle in Congress.
Schwab’s opposition to an SRO helps gird the Investment Adviser Association, named in the statement, for the fight.
“We have worked with Schwab on these important issues for a long time,” said David Tittsworth, the IAA’s executive director. “As a major custodian and service provider for thousands of advisory firms, Schwab brings a valuable and well-informed perspective to the debate. We appreciate their thoughtful approach and look forward to working with them going forward.”
Behind the scenes
Nick Georgis, vice president, practice management and strategic business development, Charles Schwab & Co. Inc., said in a November interview with RIABiz that Schwab was working hard behind the scenes on behalf of RIAs and later offered this formal statement for an article. Custodians defend their records in having RIA backs in battles for the fiduciary standard and against FINRA takeover
“We support having the same best interest fiduciary standard for broker dealers and investment advisors when advice is given, and we do not support a SRO for the RIA industry. Schwab has had conversations with SEC staff to share this point of view. Ultimately, we believe it is important that any regulations do not impede investor choice and access to a wide range of approaches to getting investment advice, whether from an independent RIA or through a brokerage account.”
It is Georgis (along with Tittsworth) who will lead a webcast entitled: “Perspectives on a SRO for Advisors and a Rule-Based Standard of Care – And What You Might Do About It” on Feb. 16 for the 6,600 advisors who use Schwab to custody more than $600 billion of assets.
Here is the full text of Schwab’s statement.
A number of securities industry trade associations, which include broker-dealers and other custodians as members, are coming out in favor of a Self-Regulatory Organization (SRO) for registered investment advisors (RIAs) that serve individual investors. Schwab disagrees with an SRO approach. This short position paper explains why. We will continue to work closely with the Investment Adviser Association, our clients and others for a thoughtful resolution of this important issue.
As part of the financial services regulatory reform process under the Dodd-Frank Act, the U.S. Securities and Exchange Commission (SEC) will soon publish its findings and recommendations in two important studies. The first, under Section 913 of Dodd-Frank, analyzes the standard of care that applies today and should apply in the future to investment advice provided by RIAs and broker-dealers. The second, under Section 914 of Dodd-Frank, analyzes whether an SRO for RIAs is needed to augment the SEC’s examination and enforcement authorities. At Schwab, we have a strong point of view on both issues based on our long history of serving millions of individual investors both directly and through independent RIAs.
Schwab supports having the same best-interest fiduciary standard for broker-dealers and RIAs any time personalized advice is given, and we believe this standard should be explicitly required by law. That does not mean, however, that broker-dealers and investment advisors are the same or should be regulated the same, including when it comes to the SRO model.
As the largest custodian for independent RIAs, we believe there is great value in an advisor examination program that is robust and fully funded. But an SRO for advisors is not the right way to achieve this goal. Principles-based regulation, as opposed to rules-based regulation which is characteristic of an SRO, has worked for over 70 years under the Investment Advisers Act of 1940, vesting the SEC with the necessary authority to oversee mid- to large-size advisors while granting the states the ability to regulate smaller advisors.
Although the SRO model was historically necessary to permit broker-dealers to enforce high ethical standards on each other, the fiduciary duty applicable to advisers already incorporates such standards and obviates the need for an SRO. That was true in 1940 and is still true today. The broker-dealer SRO model was further premised on broker-dealers’ direct participation in the capital-raising process and having both agent and principal access to the markets as members of exchanges (the first SROs) or over-the-counter trading with each other. The prescriptive nature of rules-based regulation may be appropriate in that environment due to the multiple hats that broker-dealers can wear in a complex business. Most RIAs, in contrast, are small business owners who have a very different and more circumscribed business purpose: providing fiduciary investment advice to their clients, a business model ideally suited to principles-based regulation.
Congress and the SEC have identified a gap in resources necessary to perform more regular examinations of advisors. The Dodd-Frank Act helps close that gap by shifting smaller advisors to state oversight. That, coupled with a better funding mechanism for the SEC advisor examination program, would be a much more direct way to address that gap and ensure investor protection without forcing the investment advisor industry into a likely more costly system of regulation.
Schwab will be hosting an upcoming webcast on this and related topics in February for its clients.
Excerpt from SIFMA letter
An SRO Can Provide an Effective Examination Program for Independent RIAs. RIAs that focus on providing personalized investment advice to retail customers present different concerns than do institutional advisers. Most retail RIAs that are not affiliated with a broker-dealer are small independent advisers that, apart from their RIA status, are not otherwise subject to Commission oversight. Due to the small size of these RIAs, many do not have substantial legal and compliance departments to monitor for compliance with applicable regulatory standards. These RIAs are not regularly examined by the Commission today. An SRO with examination authority over these RIAs would be an effective supplement to the Commission’s resources.
In light of the limited government resources available for examining and monitoring independent RIAs, including budget authorization impasses at the federal level, examination and enforcement of independent RIAs would be enhanced by an SRO. An SRO with jurisdiction over independent RIAs would be able to devote sufficient examination and, when necessary, enforcement resources to ensure investor protection standards are upheld. In addition, such an SRO would be able to focus on the specific activities and challenges that are unique to independent RIAs, thus making the SRO’s efforts more effective.
The full letter can be found at http://www.sec.gov/comments/df-title-ix/enhancing-ia-examinations/enhancing-ia-examinations.shtml.
An earlier version of this story said that Fidelity did not respond to a request for comment. The company’s spokesman did respond, but did not add to Durbin’s quotes from a few months ago.
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Top Executive: Tom Nally
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