Joe Russo says that 25% of his group's own membership doesn't favor extending FINRA's dominion to RIAs

May 30, 2012 — 5:18 AM UTC by Joe Russo

9 Comments

Brooke’s note: Here is one interesting backhanded recommendation of FINRA. It starts out with a fairly stinging indictment of the proposed SRO. Instead of ever getting around to saying that FINRA is a lovely organization once you get to know it better, the new FSI chairman says his organization’s big presence in FINRA will keep the latter group from getting too far out of control with RIAs. He also has some paragraphs with every embarrassing thing in the SEC’s recent history — from pornography to BlackBerry resistance. Joe Russo also says that the FSI would hardly be a fiduciary — or even be acting under a suitability standard — were it to pursue its members’ interests in repealing Dodd-Frank. You’ll have to read the whole letter to get the logic here. One thing that makes covering the advisory business interesting is the degree to which advisors speak their mind. Joe Russo is true to that legacy.

A message from FSI chairman Joe Russo

As the first-ever financial advisor to chair the Financial Services Institute, I know many of our financial advisor members have questions on why FSI is backing FINRA as the SRO for RIAs. It’s time we have a frank, candid discussion on our thinking. Please keep reading to find out why we’re supporting FINRA as the SRO for RIAs.

As we travel around the country speaking to financial advisors one thing has become very clear — there’s a lot of noise coming out of Washington, D.C. (We know we are not telling you anything new), and there’s a real need for us to have a candid conversation about our most pressing issues with our members so that you not only know what we are working on but why we are taking the positions we are taking on these issues.

This first one is the most timely — our push for a self-regulatory organization for RIAs to help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.

Two quick things: One, FSI endorsed FINRA as the SRO for RIAs over a year ago and very publicly, so this isn’t new for us; two, we’ve twice polled our financial advisor members on this issue, and roughly 75% agreed with our position. That being said, even those who see the logic behind it aren’t thrilled with giving FINRA greater reach and responsibility.

So let us say this: we are by no means oblivious to the many challenges FINRA creates as our industry’s principal regulator, nor are we saying there won’t be problems with FINRA in this expanded role. What we do know is that there is a political reality that FSI must deal with on behalf of our members — and that reality is called the Dodd-Frank Act. See: Advisory factions steel for end game as SEC’s verdict on FINRA SRO comes down.

Mind the gap

Dodd-Frank recognized the regulatory gap that currently exists — only 8% of RIAs were examined by the SEC last year. That’s an average of once every 13 years; and nearly 40% of RIAs have never been examined.

To protect consumers and level the playing field, this regulatory gap must be eliminated. Dodd-Frank mandated a study which ultimately directed the SEC to develop options to close the gap. The SEC responded with three: 1) Give the SEC more money to hire more examiners through user fees on RIAs (political fantasy); 2) have FINRA serve as the SRO for dual registrants (encouraging advisors to go RIA only and continue to skirt examination); or 3) draft legislation empowering the SEC to approve an SRO for advisers (the only political reality). See: FINRA comes up with cost projections for its SRO and the CFP Board blasts them.

Knowing that left to its own devices Washington often gets it wrong, we at FSI knew we had to take a position that would best serve investors and our members, and see it through to the end — no sitting safely on the sidelines. After careful consideration and deliberation, our board took the bold position that the only viable solution, politically and practically, is to support FINRA as the SRO for RIAs. There is no escaping the fact that this is a classic “the devil you know versus the devil you don’t” situation. See: Why advisors see FINRA as the devil.

What the hell?

Now, because of our understanding of Washington, we know a lot of what we’ve heard stems from a misunderstanding of the political reality by some of our members. We’ve heard some ask us, “Why don’t you spend your time and energy advocating for the full repeal of Dodd-Frank and not FINRA as an SRO?”

While you won’t find any raving fans of Dodd-Frank at FSI, we also intimately know the political reality, and that is that the law is here to stay for the foreseeable future. In fact, I’d go as far to say that, even if Republicans win not only a majority in the Senate, but a supermajority (60 votes), the bill still wouldn’t be repealed. You’d most likely need about 65 Republicans in the Senate to make up for those that you’d lose on the vote to get it to the president’s desk.

So while we know it would make some of our members feel good to see us advocate for the repeal of Dodd-Frank, it wouldn’t do any good, and we wouldn’t be spending the resources and influence you are giving us wisely. To put it in industry terms, we wouldn’t be acting as good fiduciaries — in fact, our approach wouldn’t even be suitable. It would just be irresponsible. It would marginalize not only FSI but the industry we represent and seriously impede our ability to impact any issues going forward.

Now that we’ve established Dodd-Frank isn’t going away any time soon, and Dodd-Frank provides an opportunity for this regulatory gap to be closed, is it going to be the SEC, FINRA or a brand new bureaucracy no one knows? For us, the answer wasn’t pleasant, but it was simple: the devil we know.

Porn free

First, everyone in D.C. knows that this Congress is never, ever, going to give the SEC more money.

Second, the SEC is fraught with problems. Lest we forget, numerous staff members were caught surfing porn rather than doing jobs, revolting over BlackBerrys so they didn’t have to work outside the office, renting office space they don’t need, leaving a beneficiary of Bernie Madoff in charge of liquidation, investigating their watchdog after he issued unflattering reports, and on and on and on. See: Compliance GPS: It may be a mistake to project too successful an image, especially in a post-Bernie Madoff world.

With all of the SEC’s very public problems, and with the SEC’s own chairman, Mary Schapiro, finally endorsing the SRO option, anyone who claims the SEC is a viable alternative isn’t being intellectually honest in terms of political reality. In addition, not all, but some of those pushing the SEC knowing this political reality are in fact doing so simply to keep the status quo.

The option of a brand new SRO or multiple SROs is also troubling. For FSI to back a strategy that could set up one or more new regulators that we don’t know and don’t have influence with wouldn’t be taking full advantage of the relationships we’ve worked years on strengthening.

You then add to the mix the fact that the Consumer Federation of America dropped its 20-year opposition to an SRO and you can see that the tide was clearly turning.

Need to collaborate

FINRA, as we said from the beginning, isn’t perfect. They are actually nowhere near perfect. But, they do have the resources to do the job, and they would be much more affordable for our members from a small-business cost standpoint than the SEC user fee proposal.

FSI has a good working relationship with FINRA. There is an FSI member on the FINRA Board, there are 20 FSI members on FINRA district committees and the FSI senior staff has a close working relationship with the FINRA senior staff. Certainly, we don’t always get what we work for with FINRA — we wish we could say we had a perfect record, but we don’t. But we do have many wins in terms of changing proposed rules and regulations coming from FINRA to our members’ benefit that we can hang our hat on.

If FINRA becomes the SRO for RIAs, FSI pledges to you that we will stop at nothing to try and ensure the most responsible and efficient, and least intrusive, regulator for RIAs that’s possible while protecting investors. And if FINRA’s not doing their job, we’re the first you’ll hear it from.

We’re here to create a healthier, more business-friendly regulatory environment for you, our members. We’re here to make your life easier and your business more prosperous, and to preserve your clients’ access to your much-needed services — period.

And we truly believe, with FINRA in place regulating RIAs, we’ll finally help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.

Sincerely,

Joseph R. (Joe) Russo
2012 chair, FSI Board of Directors



Share your thoughts and opinions with the author or other readers.

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Elmer Rich said:

May 30, 2012 — 4:42 PM UTC

We are all in this together. These are immensely complicated matters — unprecedented in fact.

Not sure what a combative approach and demonizing/finger-pointing and draggin out the other guys unprofessional behavior helps problem-solving.

Now if Russo is posturing to win points — fair enough. The people that elect him need to be placated. Fear is always the best motivator and attention getter. Slamming the other guy works real well too.

However, rhetorical tactics and moralizing derail real problem solving. Russo and his supports need to chose.

BTW, as hard headed marketers, our experience is the more regulation the more comfortable clients are and the faster the business grows. More regulation has always correlated with financial services growing. May not be causal but professionals understand more safeguards are needed as any industry grows, of course.

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Joe said:

May 30, 2012 — 4:51 PM UTC

One would think from this letter that FSI represents the interests of RIA’s. In reality, FSI represents the interests of dual-registrants.

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Fred said:

May 30, 2012 — 5:30 PM UTC

Take a close look at the FSI’s website. They represent the interests of independent Broker Dealers and their FInancial Advisors (Representatives). Their members voted for FINRA as the RIA’s SRO because they are afraid of the independent RIA business model, as are the wirehouses. Both groups are looking to stop the erosion of their market share by gaining control over the model that is providing such significant competition. Fully, unconditionally embrace the true fiduciary standard, then maybe you can be my SRO!

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Jim said:

May 30, 2012 — 8:18 PM UTC

Well, just this year Congress did increase the SEC budget. So much very never doing it. This is the most self-serving opinion I have seen since FINRA’s statements on the matter. Fred was correct when he noted that FSI and its allies have been losing their shirts and Assets to RIAs so they sure would like to control these independent upstarts. We are mainly small business people so not sure how the Republican congress would try to suppress competition and hurt small businesses at the same time if they want to honor their commitments to both. Or are those just talking points for the election?

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Fred said:

May 30, 2012 — 8:28 PM UTC

Jim:
Follow the money! Republican or Democrat controlled Congress…it doesn’t matter…if big money on Wall Street is doing the speaking.

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Peter Mafteiu said:

May 30, 2012 — 11:55 PM UTC

Nice letter by a president to the membership. However, as often the case some relevant perspectives are missing, that’s why outside of the membership, really not a lot of value.

1. Fees: we must be really stupid to think (without discussion) that user fees and Finra member fees are different. The ONLY difference is the enrichment of Finra executives (just ask Shapiro). I am embarrassed for our industry every time I hear that point.
2. Examinations: Yes, Finra looks at their members on a regular schedule. However, they have so small of a universe compared to the SEC and the additional responsibilities of the SEC that it is apples and oranges. So the data is, actually, irrelevant. By the way, did their frequent exams protect consumers? No. Read all the articles on violations, enforcement, etc. and its all re-active, not pro-active. Finra’s track record is not great, why does everyone want to pretend it is?SEC does not get a pass but they don’t control their own desitny, congress does. Finra and others can sure manipulate the data!
3. Salaries: NO Finra employee should be allowed to make more compensation than an SEC employee. Period. Shapiro’s package was nice if you are her, otherwse it is and was excessive. This is a not for profit SRO? Really? Good gig if you can get it, for sure.

Where is the discussion about removing Finra and providing those resources to the SEC? Oh, yes, that must be about money and power (and smaller government). Where do we think Finra will find the expertise to regulate IAs? By raiding the SEC – who would not want to go if there is higher compensation and RIA firms have to pay for it??

Seriously, I have never been more disapointed in my industry than I am today and have been for the last few years. Change is good as long as it does not affect me is the bias I guess everyone has as a human being.

Isn’t this really all about Finra’s losses and the opportunity to engage in a growth business, the regulation of investment advisers??

This IS about money and power and the ability to control congress!

I help RIAs, BDs and others in financial services every day. Its shocking what I see each day and then to read these kind of articles. Its like we live on different planets.

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Stephen Winks said:

May 31, 2012 — 3:57 PM UTC

THE FSI HAS CAST ITS LOT

The FSI is a brokerage advocacy group (Independent Broker/Dealers) so their support for a brokerage approach to advisory services where the broker is neither accountable nor responsible for their recommendations is no surprise.

The only problem is the FSI and FINRA can not rewrite the law delineating fiduciary standing based on 800 years of common law and supporting authentication based on statute, case law and regulatory opinion letters.

As long as the FSI and FINRA do not support fiduciary standing based on objective criteria, the broker will have a permanently inferior competitive market position relative to advisors who actually are acting in a fiduciary capacity.

FINRA and the FSI should be careful what they pray for, as the unintended consequences will be a catalyst for tens of thousands of principled brokers who will not accept inferior support, inferior value proposition, inferior technology, inferior work flow management, inferior conflict management and inferior compensation at the expense of the best interest of the investing public. FSI’s endorsement of FINRA at the expense of the consumer places the independent broker in a untenable market position that now can only be resolved by a RIA business model that makes advice (fiduciary standing) safe, scalable, easy to execute and manage as a high margin business at the advisor level, at a cost less expensive than a packaged product and a significant increase in advisor compensation.

The FSI has played the cards they were delt with and have abrogated their leadership role in advisory services—as the advisors in FSI membership can now clearily attest. Just because an advisor’s broker/dealer pays their FSI dues does not mean the advisor supports the FSI, just the broker/dealers support FSI. This disconnect counter to the best interest of the investing public is irreconcilable to advisors who by statute must place the consumer’s best interest first.

Perhaps most disturbing is FINRA’s misinformation on several fronts. First is the examinmation of advisors is deemed inadequate. There are hundreds of thousand of brokers of which FINRA claims to have examined 58% last year. This review was not in the same context of an Advisor’s review. FINRA reviews the broker’s broker/dealer and takes the b/ds word for compliance which includes the prohibition of the broker acknowledging they render advice and the prohibition of the broker acknowledging the broker having any ongoing responsibility to act in the consumer’s best interest in fulfilling the brokers fiduciary duties. This sort of examination is counter to the consumer’s best interest and makes the broker neither accountable nor responsible for their recommendations. Does this not disqualify FINRA from a position of trust and responsibility to protect the best interest of the investing public ? A second and most disturbing point of misinformation is that FINRA operates as if it has unlimited funds and has no accountability as to its cost or effectiveness. As a consequence, no thought has been give to use modern authenticated prudent processes and technology that would be far more effective at small fraction of the cost affording far superior consumer protection.

FINRA can not see beyond its traditional role (formerly the National Association of Securities Dealers) of broker advocate at the expense of the best interest of the investing public. Now the FSI has endorsed FINRA a an SRO for Advisory Services—a role in which FINRA has historically failed when it had the opportunity.

This is a sad state of affairs and failed leadership in securing public trust.

SCW

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Grey Treed said:

August 3, 2012 — 7:13 PM UTC

Wow Mr Elmer Rich It is obvious that your ideological position will not change and I’m not sure if you realize that there are a multitude of economically feasible approaches to running an independent financial services firm but with that being said im not sure that you could be more wrong with your analysis!! When you said (which I was honestly shocked to read) “More regulation has 'ALWAYS’ correlated with financial services growing.” “ALWAYS”?? Really? There are a whole host of gaudy over the top regulations that have demonstrably hindered the financial markets and securities industry in the past. You can be as Ideological as you want, but dont turn you opinion into factual dishonesty! So since we are being so definitive, that is about as ridiculous a statement as I have probably EVER heard!!

and Stephen Winks you are quick to disparage FSI’s endorsement of FINRA as a SRO but I noticed you just denigrate, you offer no solution or even a preference… I mean you wrote a small novel worth of complaints it’s strange you’d just happen to leave out any sort of resolution… ??

-Grey

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Stephen Winks said:

August 3, 2012 — 10:36 PM UTC

Grey,

The resolution is obvious, as it cited in my comment at least three times, it is to make the broker accountable and responsible for their recommendations based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters. The SEC has established it is the broker/dealer’s responsibility to provide the necessary enabling resources to make it possible for brokers to safely acknowledge fiduciary standing so advice is safe scalable easy to execute and manage as a high margin business. So each broker does not have to reinvent the wheel.

Pretty simple, the industry supports continuous comprehensive counsel required for fiduciary standing.

Now, Grey its your turn. do you have a solution? Do you as an advisor personally think the FSI was well advised to support FINRA as an SRO for advice? Because broker/dealers pay their brokers FSI membership dues, do you really think that FSI is motivated to look after your best interest or the best interest of your broker/dealer which funds the FSI ?

SCW


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