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Most RIAs prefer to pay money for SEC exams now than pay in blood later under an SRO

TD Ameritrade survey comes as resistance to FINRA empowerment wells up from wide array of organizatioms

Friday, December 10, 2010 – 4:40 AM by Elizabeth MacBride
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SEC headquarters has seen plenty of traffic lately, as companies and lobbying groups send execs aiming to influence a pending report on advisor oversight.

Elizabeth MacBride writes a weekly column on politics and regulations affecting RIAs.

A majority of TD Ameritrade advisors who responded to a survey by the custodian would pay user fees to avoid having a self-regulatory organization as their overseer.

Fifty-seven percent of 331 advisors who responded to the survey, sent in early November, said they’d be willing to pay. Most of them – 64% — said they’d pay $500 or less.

Though not a scientific sampling, the survey opens a window on advisors’ views on an issue that’s gained currency over the past month in Washington, D.C., as the SEC takes up a study of the SRO question mandated by the Dodd-Frank act. FINRA continues to lobby to be named that SRO.

“As you know, FINRA is pushing rather aggressively to be the RIA industry’s SRO,” said Skip Schweiss, managing director, advisor advocacy, for TD Ameritrade. “We’ve heard from many advisers their concern about that, so we decided to conduct a survey of our adviser clients to get a broader read on their opinions on this issue.”

Like many organizations and big companies lately, TD Ameritrade executives stopped over at the SEC’s headquarters building in November to share the company’s views on some important regulatory matters, including the question of whether RIAs should be overseen by an SRO. Of the custodians, TD Ameritrade has been the most public in its advocacy of extending the fiduciary standard to broker-dealers and of retaining the SEC as the industry’s regulator.

“When we mentioned the survey results in our meeting with the SEC, they requested a copy of the report to back their Section 914 study,” Schweiss said. (Section 914 is the part of the Dodd-Frank Act that refers to the SRO study).

The Investment Adviser Association also has been pushing the idea of user fees as an option to fund the cash-strapped SEC. Just last week, the SEC announced it was halting work on some Dodd-Frank consumer protection initiatives until it sees how much money it is allocated in the 2011 budget.

The IAA is made up mostly of large RIAs, as defined by AUM (most RIAs are de facto small businesses). What’s striking about the TD Ameritrade survey is how many small RIAs were willing to pay fees. Of the respondents, nearly 60% had less than $50 million in AUM, and all had under $250 million in AUM.

Of the advisors who said they preferred an SRO, 42% said they would prefer the CFP Board to FINRA (26%) with the rest of the respondents saying they wanted another organization entirely.

It’s worth noting that Kevin Keller, the executive director of the CFP Board, told me in an interview that the organization was not aiming to be an SRO. DC Current: What’s behind the CFP Board’s big fee increase. I don’t think there’s an upswell among average advisors to live under CFP Board regulation. But, at the same time, I have to note that nearly everyone in the advisory world in Washington, D.C., has suggested that the CFP Board is the obvious candidate.

The SEC-to-SRO switch could not happen without action from Congress, but nobody is ruling out that possibility, especially now that the House is in Republican hands.

Organizations have been busy planting stakes on the issue.

Of note:

The American Institute of Certified Public Accountants said:

_“We strongly oppose the creation of a self_regulatory organization (SRO) for investment advisers. An SRO is inherently conflicted and is not the right answer for regulation of investment advisers. We believe that FINRA would bring a broker-dealer perspective, and bias, to investment adviser examinations and that its rules-based, check-the-box approach is not conducive to adequate regulation of the investment advisory profession nor is it in the public’s best interest.”_

The North American Securities Administrators Association (ie the state regulators who are taking over regulation of RIAs with less than $100 million in AUM) said:

As the total number of investment adviser registrants subject to Commission oversight will soon be reduced by approximately 4,000 firms (approximately a 36 percent decrease), previous concerns expressed by Commissioners and other commentators prior to the Act regarding examination resources should be allayed. Moreover, to the extent the Commission requires additions to or reassignments of resources to perform investment adviser examinations, Section 991 of the Act authorizes a $1 billion increase in the Commission’s budget over the course of the next four years, enabling the Commission to augment and redistribute its resources as needed in the future.

The Investment Company Institute, which represents mutual fund companies, said:

Moreover, we do not believe the SRO model is appropriate for oversight of the advisory industry. The principles-based system of adviser regulation, which is critically important to protect the fiduciary culture of the adviser industry, as well as the wide range of business models within the industry, is not readily transferable to a more prescriptive, rules-based model that works best in the SRO context. Further, the conflicts of interest inherent in industry self-regulation – or even the illusion ofsuch conflicts – could harm the public perception of investment advisers. Finally, we do not believe that the cost of developing an adviser SRO (or building the capacity in an existing SRO, such as the Financial Services Regulatory Authority), much of which would likely be borne by advisers (in the form of member fees) and likely passed on to their clients, is an efficient use of resources.

The sharpest exchanges seem to have come between the IAA and FINRA (which has submitted three letters, the latest, in response to an SEC request, a description of a possible qualification system for RIAs that parallels that for broker-dealer reps. https://www.sec.gov/comments/df-title-ix/enhancing-ia-examinations/enhancing-ia-examinations.shtml)

FINRA’s letter reads, in part:

_Given the urgent need to improve investment adviser examinations, recent statements by the Investment Advisers Association (“IAA”), a trade association for the investment adviser industry, are troubling. ... _

If he IAA letter intends to suggest that an SRO is incapable of effectively enforcing statutory and SEC rule requirements for investment advisers, we beg to disagree. FINRA has a long history of tough, effective enforcement of the regulatory requirements applicable to broker-dealers. In 2009, FINRA conducted approximately 2,500 routine examinations, approximately 7,900 cause examinations and brought 993 disciplinary actions.

Clearly, these activities offer more than “illusory” benefits to investors. To suggest otherwise is irresponsible. If a FINRA affiliate were to seek authorization as an investment adviser SRO, it would establish equally effective examination and enforcement of SEC requirements for investment advisers.

Here’s what the IAA wrote:

While the introduction of a self-regulatory organization might result in a greater number of adviser examinations, we are not persuaded that it would result in overall improvements to the effectiveness of the current examination regime or enhanced investor protection. As noted by SEC Commissioner Luis Aguilar, an SRO “is an illusory way of dealing with the problem of resources. The issue is really one of hiring, training, and overseeing an adequate program to examine advisers.”

We continue to strongly oppose the creation of an SRO for investment advisers. We do not believe the effectiveness of the SRO model has been demonstrated and are concerned about the lack of transparency and accountability of non-governmental regulators. The SRO model is particularly inappropriate for investment advisers, given the diverse nature of the investment advisory profession and its principles-based regulatory framework. SROs also result in unnecessary and inefficient layers of bureaucracy and cost.

_This article was adjusted Dec. 14 to clarify the size of RIAs in the IAA, and the passage about the CFP Board as a possible SRO.

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