A conversation with Richard Brueckner and Mark Tibergien lends perspective to this widely held view by RIAs of the b/d regulator

June 22, 2010 — 5:12 AM UTC by Elizabeth MacBride


Elizabeth’s Note: When I started writing about financial services reform and its effect on investment advisors about eight months ago, I assumed that the advisory community’s opposition to regulation by FINRA stemmed from an aversion to more rules in general. Most entrepreneurs I know think the regulatory pendulum has swung too far toward regulatory caution. Over time, however, I noticed that many advisors didn’t see FINRA as just another irritating regulator. Their response to the idea of FINRA oversight was visceral. In their eyes, FINRA was only a little short of the devil.

A few weeks ago at the Pershing conference, I asked Richard Brueckner, CEO of Pershing and a member of the board of governors at FINRA, and Mark Tibergien, head of Pershing’s RIA custody unit, “Why do advisors see FINRA as the devil?” The two Pershing executives came at the question as agnostics: they belong to an organization that serves both broker-dealers and advisors. Their thoughtful and interesting responses led me to pose the same questions to a few other people. This article is a result of those conversations.

William Baldwin, the president of Waltham, Mass-based Financial Advisors, is open-minded. The idea that advisors and broker-dealers should be regulated together makes sense to him. He knows that in other nations, like Australia, they share a regulator. It’s not the concept of combining regulatory regimes in the United States that bothers him.


“It lacks credibility,” he said. “Its bread is buttered on the side of taking care of b-ds.”

The conference committee trying to merge the House and Senate financial reform bills reconvenes today, and many observers expect a compromise on whether and how the regulatory and legal regimes governing investment advisors and broker-dealers will be merged. One possibility is that the compromise will lay the groundwork for FINRA to regulate investment advisors.

Worst of two worlds

Baldwin is one of many investment advisors to whom that option is anathema. To them, FINRA represents the worst of two worlds: it is a rules-based regulator – and by all accounts its rulebook is very fat. Yet, the voluminous rules are there to enforce the suitability standard, which is lower than the fiduciary standard advisors currently operate under.

FINRA is so diametrically opposed to their business model,” said Mark Tibergien, head of Pershing’s RIA custody unit. “To advisors, broker-dealers are the Soviet Union and FINRA is the KGB.”

Of course, there’s no guarantee that if FINRA were to become the regulator for RIAs, that it would regulate advisors the same way that it regulates broker-dealers. Richard Brueckner, the CEO of Pershing and a member of FINRA’s board of governors, pointed out that FINRA could set up a subsidiary to regulate advisors independently.

By the statistics alone, FINRA is an obvious candidate to take on responsibility in a tougher post-Madoff regulatory world, Brueckner pointed out. FINRA has a strong balance sheet and a much better record of keeping up with audits than the SEC, which along with the states currently regulates investment advisors. FINRA examines more than half of the approximately 4,900 registered broker-dealer firms each year. By contrast, the SEC expected to audit only about 10% of the 11,000 RIA firms in fiscal years 2009 and 2010.

FINRA has a foot in the advisory camp

FINRA also looks less like an exclusive broker-dealer club than it used to. As the lines between selling investment products and giving investment advice have blurred, the companies on its board have grown to have varied interests. Sitting along with executives from J.P. Morgan and Deutsche Bank are those from San Diego and Boston-based LPL Financial, which has been making a big push to capture business from dual registrants, and Pershing, which has b-d division and custodies assets for more than 530 RIAs.

“Many of us have big advisory businesses,” Brueckner pointed out.

Yet, Mr. Baldwin’s visceral reaction to the idea of being regulated by FINRA points to how difficult it would be to combine the regulatory regimes for b-ds and advisors, especially under FINRA. Mr. Baldwin is chairman of the National Association of Personal Financial Planners, which strongly has opposed the change. The Investment Adviser Association has taken a similar stance.

The advocates tend to have more focused criticism about FINRA’s role as self-regulatory organization where the firms’ annual fees help support big compensation packages for executives.

“The SEC doesn’t put up with anything,” Baldwin said. “FINRA is supportive of the bd’s with all their blemishes.”

Arbiters of FINRA’s choosing

One example: FINRA’s role in mandatory arbitration, which requires that virtually anyone who has a brokerage account must submit to mandatory arbitration rather than filing a lawsuit. FINRA plays a role in appointing the panel of arbiters, though it recently asked the SEC for a rule change that would make it less likely that the parties in a dispute would make the cases in front of arbiters that were solely of FINRA’s choosing.

Nevertheless, the system has come in for strong criticism – and could be changed in the financial reform bill depending on what the Conference Committee decides. William Galvin, the Secretary of the Commonwealth of Massachusetts said the mandatory arbitration system is “an industry sponsored damage-containment and control program masquerading as juridical proceeding.”

Individual investment advisors tend to cite FINRA’s association with broker-dealers, its lack of familiarity with the fiduciary standard and the principles-based regulatory system the SEC uses for investment advisors as the reasons that they’d rather fall under the SEC’s oversight.

The bottom line of advisor opposition may well be that FINRA’s audits typically are longer than the SEC’s. Would FINRA apply that style to investment advisors? It’s hard to tell, but “if I were an investment advisor, I would be suspicious that this was going to cost me more money,” said Ross A. Albert, a partner with Atlanta-based Morris, Manning & Martin, LLP.

Advisors might also run the risk of losing a piece of their identity under FINRA, if they were submitting to a rules-based regulatory regime.

“Advisors think they walk on a higher level because they operate under a principles-based system,” Brueckner said. “This may ultimately be the direction of future regulation which will be of benefit to both the end client and the profession.

Article adjusted June 23 to add a second sentence to Rich Brueckner’s final quote.

No people referenced

Mentioned in this article:

LPL Financial
Asset Custodian
Top Executive: Bill Morrissey

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


Harold Evensky said:

June 27, 2010 — 4:26 PM UTC

A “Holier-then-thou” splitting of the investment world into “good guys” and “bad guys” is not only unfair, it is counter productive. If we focus less on protecting our turf and more on what will best serve the interest of the investing public and recognize that most advisors, whatever their employment or compensation structure, care about their clients’ best interest, the public will be well served.

How? Congress is likely to finalize a bill that ultimately requires anyone providing personal advice being held to a principal based fiduciary standard. The ultimate regulator of that duty is likely to be FINRA. As a consequence, in order for the final outcome to resemble a world in which all advisors are held to a substantive fiduciary duty, the SEC will have to enact substantive principal based standards and the regulator (e.g., FINRA) will have to honestly and aggressively enforce those standards. As a consequence we (i.e., those of us currently in the RIA world) have two options; #1 – continue to scoff at the SEC’s motives and call FINRA the devil or #2 – work, to whatever extent we can, with the SEC and a future fiduciary regulator to educate them regarding the unique nature of principals based advice and support their efforts.

Although Option #1 may provide a temporary visceral high, it is counterproductive and unprofessional and will result in our voices being ignored. If you believe as I do that advisors across the spectrum of employment and compensation structures believe in placing their clients’ interest first, Option #2 offers hope. I know I’m an optimist; however, after numerous meetings with SEC Commissioners, staff and FINRA staff, I’ve come to believe that both organizations not only understand the differences between Rules and Principals based standards, they beleive in substantive fiduciary principals and strongly support the application of Principal based standards for those providing financial advice. Their quandary is not how to work around Principals but rather how to make Principal based standards work in the real world. Professionals from the current RIA world can be of the greatest help by working with the SEC and future regulators to assist in developing and implementing realistic standards.


Debbie Nixon said:

June 29, 2010 — 5:00 PM UTC

I find my clients, RRs and RIAs alike, are most concerned about how to regain lost trust with their clients, regardless of the standard with which they must comply. The level of passion on both sides of the regulatory debate is fueled both by care for the client and legitimate concerns about the viability of their chosen business, neither of which are mutually exclusive. Or are they? An interesting question for an advisor today is: what conversations are you having with yourself and others, and how are those conversations working for you? IF the answer is they are not working to help you build or rebuild trust with clients, then what conversation would?


WSLady said:

March 12, 2011 — 10:06 AM UTC

Dont forget, Madoff was a BD audited by FINRA several times and FINRA (under Schapiro) did not catch the FRAUD even though they had the tools and authority to match the Madoff IRA books with the BD and failed to do so. The same situation holds for the fraud at Bayou.


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