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Johnson amendment a stalking horse for FINRA oversight of RIAs?

Advisor groups say legislative language lays ground for shift or regulators; others see it is a 'prudent measure'

Author Sara Hansard and Elizabeth MacBride February 18, 2010 at 5:24 AM
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Tim Johnson: Proposing a study instead of immediate reform of fiduciary standard

Barbara Roper


Tim Johnson


Christopher Dodd


Bob Corker

Stephen Winks

Stephen Winks

February 18, 2010 — 4:22 PM


Senator Johnson could not possibly understand what it literally means to act in the consumer’s best interests and advance such a proposal. It is not in the best interest of the investing public and therefore not appropiate public policy. The self interests of the industry again takes precedence over that of the consumer. This is the reform in the best interests of the consumer that regulators, legslators and consumers all agree must occur if the trust and confidence of the investing public is to be restored. Senator Johnson ignores the fiduciary duties specifically required under ERISA and UPIA and denigrates the entire concept of fiduciary standing which were hundreds of years in the making. The voting public in South Dakota might be interested in understanding why Senator Johnson places the self interest of the brokerage industry before that of the consumer, the investing public.


Ron A. Rhoades

Ron A. Rhoades

February 19, 2010 — 1:47 PM

As this article alludes to, the substantial economic interests of large broker-dealer firms, including Wall Street’s investment banks, plus insurance companies, oppose any extension of the fiduciary duty. Moreover, they even seek, in the name of “regulatory reform,” to lessen the existing bona fide fiduciary standard for RIAs.

The major culprit in FINRA. It advocates not on behalf of the consumer, as a regulator should, but on behalf of its member firms. Rather than consistently seek to raise the standards of the securities profession as envisioned by the author of the Maloney Act (which led to the creation of NASD, now FINRA), it has consistently opposed any raising of standards of conduct, clinging to a “suitability” standard which relates nearly completely as to only investment risks, with little or no regard given to the fees, costs, tax impact, etc. of investment products and strategies on the consumer.

Moreover, I am fearful that the language contained in paragraph “(f)” of the Amendment would be construed by the SEC, which has long been subjected to regulatory capture by the very BDs it regulates, as a grant of authority to “harmonize” BD and RIA regulation – and lead to a lowering of standards of conduct for RIAs in the process. So many SEC rules of late have refused to apply the Advisors Act broadly, as Congress intended. For example, the fee-based accounts rule (overturned in recognition that fee-based accounts constitute “special compensation” and render the BD exclusion inapplicable). On the same rationale, the 1% annual 12b-1 fee also constitutes “special compensation” and is but an investment advisory fee in drag – but the SEC has given no indication that it will even consider this issue. Additionally, the “two hats” proposed rule of Sept. 2007, and the SEC’s tortured interpretation of “solely incidental” in the associated release, truly challenges the truth that “words should be given their meaning.”

The SEC’s refusal to apply the Advisors Act to the investment advisory activities of registered representatives and BDs is bad enough, and constitutes a graver error of inaction on the SEC’s part. As to a grave error of affirmateive and incorrect action, FINRA is doing everything possible to weaken RIA regulation. This is an economic issue, pure and simple. FINRA and its BD firms desire to preserve an archaic business model that consumers in today’s complicated financial world don’t want. (Ask any consumer, “Do you want to work with someone who sells products, or someone who does not … 90% or more of the time the consumer wants the trusted advisor, not the product salesperson.) Forward-thinking RIAs and RRs recognize this, and will provide consumers with what they desire. And they will feel better each day, as they work in an environment with greater investment choices, fewer conflicts of interst, and in a client-centric enviroment.

Kudos to the Consumer Federation of America and Americans for Financial Reform for their timely, and well-written, letter. And shame on FINRA for again advocating lower standards for RIAs, and reduced protections for investors. FINRA is a failed regulator, and consideration should be given to dismantling it and giving its authority to someone who will look out for individual investors, first and foremost.

A professional regulatory organization, whose members are individual investment advisers and financial planners, would be a far better structure, to preserve the fiduciary standard of conduct and to promote the highest standard of conduct under the law. History has shown that professionals – knowing the importance of the fiduciary standard to preserving client trust – will maintain it. History has also shown that corporate interests, such as FINRA, will do everything possible to avoid application of fiduciary standards.

FINRA’s numerous failures as a regulator over the past decade are just too great, in both quantity and severity. In my personal view, FINRA should be disbanded, and a better regulator created for the benefit of professionals and consumers.

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