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Is FINRA oversight a fait accompli? It's starting to feel that way.

IAA's Tittsworth says advisors still have the chance to play up small-business angle to submarine legislation

Tuesday, November 23, 2010 – 5:38 AM by Elizabeth MacBride
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David Massey, NASAA president, is arguing that the SEC has the bandwidth to continue regulating advisors.

After years of lobbying to become RIAs’ regulator, FINRA may finally be on a clear path to closing the deal.

Without much fanfare, Richard Ketchum, the CEO of FINRA, has been sounding more and more certain in his speeches, like this one at a seminar hosted by The Securities and Financial Markets Association Compliance and Legal Society.

Wsj.com reported that he told the crowd: “We’re not standing on a street corner saying 'We’re waiting and here,’” said Ketchum on Tuesday. FINRA, however, is “uniquely suited” for the task, he said, especially for regulating brokerages that are also dually registered as investment advisers. Here’s the article: https://online.wsj.com/article/BT-CO-20101116-710974.html?mod=dist_smartbrief

Deficit hawks

Ketchum, like many in the industry, may have done the political calculations that give him an extra measure of confidence. The key factor here is the takeover by the House of Representative of deficit hawks.

Their presence makes it much less likely that the SEC will see the big jump in its funding that many (though not all) observers agree is necessary if it is to regulate the remaining large and complicated advisors on its plate. For the U.S. government, FINRA may be a cheaper option.

On Jan. 17, the SEC is expected to release a study on the question of whether a self-regulatory organization to take over some or all of the regulation is a good idea.

“I assume that what the report will say is that the SEC doesn’t have enough resources: ‘We need legislation to designate one or more SROs for investment advisors,’” said David Tittsworth, the executive director of the Investment Adviser Association, which has been the chief opponent of the idea of FINRA as advisors’ regulator. “That would be my guess.”

But wouldn’t the expected gridlock hold up the change? Changing advisors to an SRO’s oversight would require legislation, Tittsworth says.
“I don’t think it’s out of the question that something could move fairly quickly,” Tittsworth said.

Key to his political calculation is the fact that Rep. Spencer Baucus (R-Alabama) is in line to be the chairman of the House Financial Services Committee. He has favored the idea of FINRA-as-regulator. Indeed, the idea saw plenty of play last year during the financial reform debate. https://www.riabiz.com/a/130001.

One problem is that no one has put forward a great plan to counter the FINRA idea, besides bulking up the SEC. In the meantime, Ketchum has made a case over and over again for FINRA oversight. In the WSJ.com article, he talked about a holding company structure. Richard Brueckner, a member of FINRA’s board, made a similar suggestion last spring.

Advisory groups like the IAA have lobbied for more money for the SEC – and even taken the position that the industry would pay user fees to bring that regulation to reality. That idea just hasn’t flown so far – and even though it doesn’t involve taxpayer funds, might not be popular with the anti-government crowd moving in Washington, D.C.


“Some people have said, ‘Why doesn’t the IAA become an SRO?’” ... I don’t think that’s a realistic possibility unless we put time into it,” Tittsworth said.

Not to mention that the IAA has consistently argued against not only FINRA particularly, but the SRO model in general, which has built-in conflicts of interest.

Of course, advisory groups that don’t want FINRA as their regulator have been in long-shot battles before. Last spring, it seemed impossible that the fiduciary standard would be part of Dodd-Frank.

Lobbying on the FINRA issue is heating up. The North American Securities Administrators Association, which represents state regulators, filed its public comment letter last night. Here are excerpts:

“... NASAA firmly believes that when it comes to the important subject of investment adviser regulation, there is no regime superior to the governmental collaboration between the states and the Commission,” it reads.

And also, “The chief concerns the states have with the designation of an SRO for the oversight of investment advisers are the collaboration, transparency, accountability, and conflict issues that have always been inherent to the SRO model.”

NASAA did not directly criticize FINRA in particular, except for this paragraph:

Uninformed decisions

“Collaboration issues aside, the regulatory work performed by SROs lacks transparency. Although SROs have been performing governmental functions for decades, they are not subject to similar Freedom Of Information Act (FOIA) and public records requirements as are the Commission and state securities regulators. Even where there is public disclosure by SROs regarding members, as in the case of BrokerCheck, the SRO has placed limitations and filters on regulatory records that far exceed FOIA provisions. The end result is that vital information is withheld from the investing public. Without greater transparency, investors cannot obtain the information they need to make informed decisions.”

Advisors may be waking up to the possibility of FINRA as regulator, too. Tittsworth suggests that because naming an SRO for advisor would require legislation, that advisors get in touch with their legislators – and to emphasize their small business status when they do.

Elizabeth’s note: FINRA has a section on its web site devoted to Ketchum’s speeches, but the last speech posted there was from May. There’s no question that the public can demand — and receive — more information from the SEC.

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