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Why FINRA's power grab for RIAs needs to be stopped to avert the death of the profession, Part 1

Looking back from the year 2025, the author recounts how FINRA seized regulatory control and crushed the life out the once-thriving RIA channel

Wednesday, May 30, 2012 – 4:37 AM by Guest Columnist Ron A. Rhoades
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Ron Rhoades: FINRA was already an expert at protecting its large Wall Street firms from competition.

Brooke’s note: In this two-part series, Ron A. Rhoades provides a cautionary vision of a future should FINRA’s power grab to assume control over registered investment advisers succeed in Congress. Similar to his earlier RIABiz column warning of dire consequences should the SEC adopt a diminished “new federal fiduciary standard” See: Why a swing-and-miss on fiduciary standards will haunt us for decades, Rhoades provides another dystopian view of the future should FINRA, dominated by its large Wall Street broker-dealer firm members, assume control of the regulation of RIAs.

While this two-part column is long, even by Ron Rhoades’ own standards, given the importance of this issue to our readers RIABiz presents this column in its entirety over two days. For part two, read: An in-depth analysis of FINRA’s attempted takeover of RIAs and why the group should be disbanded, Part 2. This is just the type of “big swing” we expected from the chairman-elect of the National Association of Personal Financial Advisors, who recently called FINRA the “greatest threat I’ve seen to the financial advisory industry.” See NAPFA’s appointment of a new chairman could be a big deal for RIAs.

See: New FSI chairman isn’t sugarcoating FINRA’s shortcomings but blasts the SEC on porn and Blackberries in this letter.

Part One — a vision of a future under FINRA’s dominance of the financial services industry, is set forth below. Also included are sample letters to Congress. Part Two — a more detailed examination of FINRA and a call for its termination — is set forth tomorrow.

In the year 2025

Imagine that it is now 2025. America staggers from another financial crisis, this time causing what just two years ago in 2023, was called the “Second Great Recession” but which since has become widely termed the “Second Great Depression.” What led to this economic collapse? And why does the economic future of America appear so dismal in the years and decades ahead? Finally, economic commentators are directing their analysis at a singular root source and trigger — Congress’ expansion of FINRA’s power through its power grab for oversight of registered investment advisers early in the 2010s. See: A big California RIA fires off a letter to Rep. Bachus decrying FINRA as SRO pick.

While the Financial Industry Regulatory Authority Inc. falsely characterized its own failures in uncovering the Bernie Madoff Ponzi scheme as a “regulatory gap,” the real reason behind FINRA’s power grab to extend its power over the investment adviser community was the dramatic emergence of small businesses providing objective financial and investment advice. Solo practitioners and small firms surged in number, providing investment advice to millions of Americans in a manner which directly competed with FINRA’s members. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.

The rise of the RIA model

According to statistics on FINRA’s website back in 2012, the number of broker-dealers registered with FINRA declined by 11% over the previous five years, while the number of registered representatives declined by 6%. According to the SEC staff’s 2011 Report, between Oct. 1, 2004, and Sept. 30, 2010, the number of SEC-registered investment advisory firms increased 38.5%, from 8,581 to 11,888. And this does not count the surge in the thousands and thousands of even smaller businesses functioning as financial planners and investment advisers, who fell under the oversight of state securities administrators. See: Wall Street thriller 'Margin Call’ is a cautionary tale — even for RIAs.

In a sense, it all went back further — to 1983, when a small group of professional investment advisors had a vision — create an organization for solo practitioners and small firms to foster the provision of fee-only, trusted financial advice for the benefit of all Americans. Selling no products, and receiving payment for their expert advice only directly from their clients, these independent financial planners continue to subscribe to the highest standards of conduct and avoid the multiple, nefarious conflicts of interest that permeate the Wall Street firms and which fuel Wall Street’s excessive profits and mindless executive bonuses. The result was the National Association of Personal Financial Advisors, a voluntary organization of independent registered investment advisers who practiced fee-only, comprehensive financial planning. See: NAPFA faces test if 'fiduciary’ status becomes norm.

While over 2,400 caring investment and financial advisors had joined NAPFA by 2012, many tens of thousands more chose to also practice in the same business model as fiduciary investment advisors (including tens of thousands who also undertook financial planning). In the five years before 2012, when FINRA assumed control of registered investment advisers, other leading organizations, including the Certified Financial Planner Board of Standards, Inc. (with nearly 66,000 certificants in the United States as of 2012) and the Financial Planning Association (with approximately 23,600 members and more than 90 chapters in the United States as of 2012) adopted similar high fiduciary standards.

Hence, more and more with each passing year, stockbrokers (registered representatives of broker-dealer firms) left the product sales mentality of Wall Street for the small businesses and small professional firms of independent registered invest advisors. Why? Because they want to be able to act in the best interests of their clients at all times, to care for their clients, and to possess the tremendous satisfaction flowing from assisting others in a true fiduciary-client relationship. See: IBD reps are new wave of breakaways to the RIA channel, say some recruiters and custodians.

The empire strikes back

Of course, all of these developments had not gone unnoticed by the large Wall Street firms. As consumers continued to seek out independent investment advisers for their trusted counsel, the giant investment broker-dealer firms of Wall Street struck back through their membership organization, FINRA, and the industry’s additional lobbying arms, the Securities Industry and Financial Markets Association and the Financial Services Institute Inc.

Seeing its members’ numbers dwindle as consumers fled the multiple conflicts of interest present when Wall Street firms hawk their investment wares See: A conversation between a wirehouse advisor and a senior citizen who seeks trust, FINRA proposed to Congress that it take over the regulation of registered investment advisors — including those small businesses and trusted independent financial advisors who had previously been registered with state securities bodies. The Investment Adviser Oversight Act of 2012, sponsored by Rep. Spencer Bachus, was subsequently adopted by an ill-informed Congress. It authorized the SEC to anoint “one or more self-regulatory organizations” for registered investment advisors. See: Influential fiduciaries endorse bootstrapping advisory-industry SRO.

However, even the “one or more” language of the 2012 Act was misleading. The same language had been utilized to create the National Association of Securities Dealers (now FINRA) in the 1938 Maloney Act. FINRA knew that the SEC would never devote its precious limited resources to approving more than one organization to oversee investment advisors. Moreover, the SEC was fearful of a “rush to the bottom” if two or more organizations were formed, as well as other inherent difficulties which could arise. According to the U.S. Securities and Exchange Commission, Division of Investment Management Staff Report, Study on Enhancing Investment Adviser Examinations (As Required by Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act)” (Jan. 2011) (hereafter SEC Sect. 914 Report), the SEC’s staff noted:

“Multiple SROs also could lead to regulatory arbitrage, as SROs seek to attract members by offering a more accommodating regulatory and oversight program or by charging lower fees leading to inadequate funding for regulatory programs. Multiple SROs also could be more costly than a single SRO because they would be less likely than a single SRO to achieve economies of scale. Moreover, different SROs would likely, over time, develop different approaches to applying the [Investment] Advisers Act [of 1940] and their own rules to similar activities. Prevention of these consequences would require vigorous oversight by the Commission. Adequate oversight would require Commission resources, and multiple SROs would require a corresponding greater amount of resources.”

Crushing the competition

Everyone — including the SEC and FINRA — knew that the 2012 Act would enable FINRA to succeed in obtaining sole oversight of independent investment advisory firms.

In essence, through its power grab to gain authority over registered investment advisers, FINRA and its broker-dealer members sought to stamp out their competition. And FINRA was already an expert at protecting its large Wall Street firms from competition, for it had already successfully used its arsenal of heavy regulation and ever-increasing fees and costs to force many small businesses, operating as independent broker-dealer firms, to shut their doors. FINRA was long perceived to be the “nothing more than the hit man for large brokerage firms.” [John Crudele, “Small firms claim Finra targets them,” NY Post (May 26, 2011). See: Why advisors see FINRA as the devil. Also see Securities Log Blog, “Small Broker-Dealers Closing at Fast Pace,” Securities Law Blog (June 24, 2011) (“Over 500 broker-dealers are expected to close in the coming year … A large part of the problem, if not the entire problem, is overzealous regulation.”). Also see Dan Jamieson, “Would-be candidates for Finra board criticize SRO,” InvestmentNews (May 27, 2012) (”'Small firms are not represented, in large degree, with any kind of class’ on the board [of FINRA]”).

FINRA was, and still remains, controlled by the large Wall Street broker-dealer firms which form the core of its membership. Moreover, the pervasive “FINRA reports to us members” attitude of FINRA’s member firms underlay FINRA’s weak regulatory culture. Each and every time FINRA would stray from doing the large broker-dealer firms’ bidding, FINRA was reminded by its members of who controlled its purse strings. [See, e.g., Dan Jamieson, “Would-be candidates for Finra board criticize SRO,” InvestmentNews (May 27, 2012) wherein Dock David Treece, a partner at Treece Financial Services Corp. in Toledo, Ohio, stated: “they [FINRA] seem to have forgotten who their clients are and who pays their bills.”)

$50,000 a year to FINRA

The nearly immediate result of FINRA’s takeover of independent registered investment advisers was predictable. FINRA predicted annual regulatory costs of $150 million for the oversight of registered investment advisers. This was less than one-third of the annual amount predicted by a study undertaken by the independent Boston Consulting Group. In reviewing FINRA’s estimates, the Boston Consulting Group noted FINRA’s egregious cost omissions — the vast discrepancy in cost estimates were due to erroneous assumptions on examiner productivity (far beyond the productivity obtained by FINRA’s own examiners when examining broker-dealer firms) and the omission of substantial overhead costs. See: Creating an SRO would cost 100% more than SEC exam program, study shows.

Needless to say, when FINRA finally levied (and shortly thereafter increased) its registration fees, the average registered investment adviser firm paid nearly $50,000 a year to FINRA. Additional tens of thousands of dollars were spent by registered investment advisers each year in internal staffing costs and compliance consulting costs to attempt to comply with FINRA’s maddening array of regulations.

Life and death struggle

Hence, shortly after FINRA achieved oversight of RIA firms in 2012, FINRA used the same tactics it had used on small broker-dealers (heavy-handed regulations, high and ever-increasing registration fees and costs) to stamp out the movement of both financial advisors and Americans to a business model built around independent financial and investment advice. Why? To preserve Wall Street firms’ high level of profitability — a business model which could not continue to thrive if exposed to the scrutiny of expert independent investment advisers (who held allegiance not to Wall Street but rather to their individual clients).

Thousands and thousands of small businesses — registered investment advisers who provided cost-effective and objective advice to millions and millions of Americans — simply disappeared, virtually overnight.

A few surviving registered investment advisor firms managed to eke by, but only by cutting other expenses and raising their fees to their clients. The long-standing non-profit voluntary associations — the Financial Planning Association, NAPFA and the Investment Adviser Association — all soon folded as economic pressures forced their members to terminate their memberships.

'CIA’ trumps CFP

At first the CFP Board held its ground, for it awarded the coveted CFP® certification. See: CFP Board makes a raft of changes — including plans to send out press releases about CFP members who declare bankruptcy. Yet, having made enemies of the large Wall Street firms through the CFP Board’s embrace of the true fiduciary standard of conduct, FINRA soon found a way to eliminate the CFP certification. Spending just a minute portion of its billion-dollar reserves, FINRA established a new certification — “certified investment adviser” — and ensured through national advertising its recognition by consumers. FINRA permitted all CFP certificants to become automatically eligible for the new certification. After just a few years, with the CFP certification falling behind in significance to consumers relative to the newer CIA certification mark, the CFP Board lost tens of thousands of certificants and also folded.

The long-term effects of FINRA’s takeover of registered investment advisers were felt even by government agencies such as the Department of Labor and the SEC. FINRA gathered up more and more power, for it soon acquired additional authority to regulate other aspects of the financial services industry. [See Bruce Kelly’s “Finra outlines expansion plans,” InvestmentNews (May 27, 2012 in which chief executive Richard Ketchum stated his plans to oversee the exchanges and other financial services activities.) Even state securities regulators, who for years were frustrated in their efforts to prevent fraud by FINRA’s refusal to share broker-dealer investigatory results, soon succumbed to FINRA’s additional move to oversee all investment advisers, regardless of size. Hundreds of examiners at the SEC, DOL, and state securities regulators lost their jobs.

The influence of the DOL and SEC in efforts to secure protections for individual investors waned, and eventually was nearly extinguished as FINRA grew in size and in power. Each time the DOL and SEC sought to enhance consumer protections, FINRA with its multimillion-dollar lobbying machine engaged its allies in Congress to thwart their efforts. The DOL and SEC’s reputation as effective government agencies suffered until they, too, were broken up by Congress, which shifted their functions transferred to other departments and agencies.

Lowering standards

Shortly after FINRA’s takeover of registered investment advisers, FINRA promulgated a “new federal fiduciary standard” based on disclosure, rather than avoidance, of conflicts of interest. Worse yet, FINRA’s large Wall Street firms influenced FINRA to permit disclosures to be “casual” (e.g., “Our interests may not be aligned with yours”) rather than the very specific, clear disclosure of material facts in a manner ensuring client understanding, as required under a true fiduciary standard. Under the false assertion that “access equals disclosure,” FINRA further permitted disclosures to be buried in the websites of the firms it oversaw, rather than affirmatively presented to consumers.

Never mind that FINRA ignored a huge body of academic research which previously revealed that disclosures were completely ineffective to safeguard consumers (see, e.g., CITE), and that disclosure of a conflict of interest was shown to actually lead to worse advice being provided by the advisors (see, e.g., CITE).

Lawyers across America were saddened by this redefinition of the fiduciary principle, and began referring to the “FINRA Fiduciary Standard’ as separate and distinct from the “True Fiduciary Standard.” The late Supreme Court Justice Benjamin Cardozo, who so long ago warned against the “denigration” of the fiduciary standard by “particular exceptions,” rolled over in his grave.


Even worse, FINRA permitted the fallacy called “hat switching” to continue by dual registrants (those under fiduciary standards as registered investment advisers change hats to become non-fiduciary registered representatives, with completely inadequate disclosure of the change). FINRA continued its intentional ignorance of the indisputable fact that no individual investor in their right mind would ever permit a fiduciary to remove his or her “fiduciary hat” and switch to non-fiduciary status, where advice on financial matters or investments was reasonably foreseeable to be provided in the future. For why would any rational investor ever accept such a low standard of conduct (“suitability”) for the provision of advice, in place of the true fiduciary standard of conduct — the highest standard under the law?

No wonder the CEO of FINRA, when asked in late 2012, refused to commit FINRA and its members to a true fiduciary standard for the provision of individualized investment advice. (See Exhibit 3, below.) There was no way FINRA would require the many changes in the business models under which multiple (often undisclosed or only casually disclosed) conflicts of interest existed. (Of course, the true fiduciary standard is, at its core, a restriction on conduct; again and again FINRA argued that the business conduct of its members should not be affected by imposition of a fiduciary standard.)

Absolute power

In the end, there was no way FINRA would hurt its large Wall Street member firms’ ability to sell investment products with exorbitantly high fees and costs, Preservation of the high profits of FINRA’s influential members — the large Wall Street behemoths whose influence over every aspect of American’s financial lives continued to expand — continued to be FINRA’s paramount mission.

Adverse consequences for the American consumer ensued nearly immediately. Within months, private litigants lost important substantive rights. The common law true fiduciary standard, which had survived preemption by express congressional intent in the Investment Advisers Act, was subsequently judged to be preempted by FINRA’s rules (under a different legislative fiat). As a result, the “FINRA Fiduciary Standard” (not a true fiduciary standard at all) limited all investors’ substantive rights. And, in arbitration proceedings, which were now mandated for all individual investors by FINRA’s rules, countless millions of investors were denied access to the courts for redress.

Of course, over the past 13 years, FINRA has flourished. The million dollar compensation packages to its own executive officers continued and, based on the justification that their duties were now broader, were expanded even further. FINRA chairman and CEO Richard G. Ketchum was paid a total of $2.6 million in 2010, and more than a dozen other present and past FINRA regulators also pulled down pay topping $1 million for 2010. (See: William P. Barrett, “FINRA Top Salaries Remain Squarely In The 1%,” Forbes (Dec. 13, 2011). Of course, their salaries inflated even more as FINRA continued to gain power and oversight over other aspects of the financial industry. Even though FINRA remained a quasi-governmental entity, no limits were ever placed on its lobbying expenditures and executive compensation.

The revolving door of those senior officers of FINRA with Wall Street firms continued. Through implicit promises of large compensation upon departure from FINRA, the large Wall Street firms held hostage any thought of independent judgment on the part of FINRA’s senior executive staff.

Extinction event

Wall Street’s massively large broker-dealer firms flourished. As the independent registered investment adviser community virtually disappeared overnight, and standards of conduct for broker-dealers returned to their low levels, Wall Street firms stepped up their manufacture and sale of complex, expensive investment products, each embedded with layers and layers of hidden fees and costs which individual investors were unable to discern.

Financial planning, which had made great strides in its efforts to become a recognized profession, reverted back to being a means to establish trusted relationships, then betray that trust by selling expensive (i.e., profitable for Wall Street firms) investment products. See: Part One: Investment Advisers: Is our path toward, or away, from a true profession?.

After 2012, FINRA continued to permit the use of titles and designations which denoted relationships of trust and confidence, even when none existed, as a means to engage in product sales. (See James J. Angel, Ph.D., CFA and Douglas McCabe Ph.D., McDonough School of Business, Georgetown University, “Ethical Standards for Stockbrokers: Fiduciary or Suitability?” Sept. 30, 2010: “Where the fundamental nature of the relationship is one in which customer depends on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of the customer. To do otherwise — to give biased advice with the aura of advice in the customer’s best interest — is fraud.”)

U.S. economy crumbles

The impact on consumers? Consumer confusion surpassed previous levels as FINRA slowly yet inevitably weakened the protections afforded to individual investors. Consumer distrust of the financial services industry grew to higher and higher levels, eventually choking off an important supply of capital — necessary fuel for America’s economic growth. Instead, consumers turned to commercial banks, and low-yielding certificates of deposit, for their investment needs.

Without adequate regulation over these risky practices, only a decade passed before another financial crisis ensued. As predicted earlier in the AES Report, “Unless U.S. securities laws are changed to address the conflicts-of-interest at FINRA, future financial crises cannot be prevented.” This time, again, the U.S. taxpayer suffered as huge influxes of capital were made by the U.S. government into the huge “too-big-to-fail” investment banks and broker-dealer firms. While these firms continued to survive — and thrive — competing community banks once again succumbed as small businesses across the U.S. failed and defaulted on their loans.

Once again unemployment rose to record levels — this time nearly eclipsing the 25% unemployment levels seen in the First Great Depression. Social discord arose anew, prompting nationwide protests — often put down by authorities with excessive use of force (and pepper spray, stun guns, and more). America’s huge budget deficit ballooned again, but this time the credit rating agencies downgraded the United States of America U.S. Treasury bills, notes and bonds to junk bond status. Massive cuts in government benefits were mandated, along with major tax increases. America remains in an economic morass of unforeseeable duration, similar to the one Greece didn’t emerge from until decades after defaulting on its debt.

The Second Great Depression

Now, it is 2025, and America’s Second Great Depression continues. Unemployment remains well above 20% in the United States. America’s economy continues to contract, and deflation has set in. There is no end in sight to the current economic crisis, nor any available intercession by government to “turn the tide.” America can no longer afford even a substantial portion of the social safety net promised to its citizens. As unemployment benefits prove inadequate or lapse, and requirements for food stamps become more strict, many more Americans have turned to food banks. But, in a much worse situation than 2009-2010, the food cupboard is largely bare. Many of those who charitably contributed to food banks now are their customers. And many Americans, including children, go hungry each day as a result.

All of this is due to the grant of power to FINRA, which it used to stamp out independent investment and financial advice. FINRA continued to promote the concept that individual consumers should be informed and protect themselves from Wall Street’s abusive practices. However, as so many experts have opined, the fact is that we should no more expect the vast majority of individual consumers to be able to successfully navigate today’s complex financial world than we would expect them to act as their own attorney or physician.

Greed is legal

Even Hollywood predicted, in a fashion, the abuses which were to follow. “The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.” So stated Michael Douglas as the infamous Gordon Gekko in “Wall Street” (1987). He also stated, in that movie: “It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or gained; it’s simply transferred from one perception to another … If you need a friend, get a dog .”

More recently, in “Wall Street 2: Money Never Sleeps” (2010), Michael Douglas reminisces: “Someone reminded me I once said 'greed is good’ ... But here’s the kicker: Now, it seems. it’s legal.”

Too bad

Even the father of modern capitalism, Adam Smith, knew that constraints upon greed were required. While Smith saw virtue in competition, he certainly recognized the dangers of the abuse of economic power in his warnings about combinations of merchants and large mercantilist corporations. See: One-Man Think Tank: What would Adam Smith say about the fiduciary standard?. See “One-Man Think Tank: What would Adam Smith say about the fiduciary standard?” https://www.riabiz.com/a/4063107.

For Adam Smith also recognized the necessity of professional standards of conduct, for he suggested qualifications “by instituting some sort of probation, even in the higher and more difficult sciences, to be undergone by every person before he was permitted to exercise any liberal profession, or before he could be received as a candidate for any honorable office or profit.” [Adam Smith, The Wealth of Nations, Modern Library edition, 1937, at p. 748, see also pp. 734-35. As seen, “Smith embraces both the great society and the judicious hand of the paternalistic state.” Shearmur, Jeremy and Klein, Daniel B. B., “Good Conduct in a Great Society: Adam Smith and the Role of Reputation.” D.B Klein, Reputation: Studies In The Voluntary Elicitation Of Good Conduct, pp. 29-45, University of Michigan Press (1997), available at https://ssrn.com/abstract=464023.) In essence, long before many of the professions became separate, specialized callings, Adam Smith advanced the concepts of high conduct standards for those entrusted with other people’s money.]

Too bad FINRA, dominated by its large Wall Street firms, was given the legal authority to promulgate greed. Too bad for registered investment advisers and financial planners. Too bad for the IAA, FPA, CFP Board, and NAPFA. Too bad for hundreds of millions of Americans. Too bad for America itself.

'What can I do?’

If the foregoing vision of the future concerns you, take action now. On June 6, the U.S. House of Representatives is scheduled to hold a hearing on Rep. Bachus’ bill. Only one organization — representing state securities administrators — will be permitted by Rep. Bachus to testify in opposition to the bill.

Today is the day to contact both your U.S. representative (to find her or him, visit www.house.gov/representatives/find/) and U.S. senators (to find them, visit www.senate.gov/general/contact_information/senators_cfm.cfm). Express your desire that Rep. Bachus’ bill be defeated and that FINRA be disbanded.

Sample letters to Congress are set forth in Exhibit 1 (for use by financial advisors) and Exhibit 2 (for use by consumers), below.


[Your Name]
[Street Address]
[City, Street ZIP Code]

[DATE, 2012]

[Recipient Name — i.e., member of Congress]
[Company Name]
[Street Address]
[City, Street, ZIP Code]

RE: The Investment Adviser Oversight Act of 2012

Dear [Recipient Name]:

As an independent registered investment advisor with “[Firm Name]” and one of your constituents, I would like to express my strong opposition to recently proposed legislation calling for a self-regulatory organization (SRO) for investment advisors. The bill, if enacted, will cost thousands of jobs as small businesses — registered investment advisers and financial planning firms — are forced to shut their doors under the burden of expensive, duplicative and heavy-handed regulation.

The Bachus-McCarthy bill attempts to improve the examination frequency of investment advisors by authorizing one or more SROs to supplement SEC oversight. While I support efforts to strengthen investor protections — it must be done in a way that ensures appropriate, efficient and cost-effective oversight.

A recent study conducted by the Boston Consulting Group found that outsourcing the current SEC oversight of registered investment advisors to a new SRO would be twice as expensive as directing adequate resources to the existing SEC oversight program.

In addition to its high cost for implementation, this legislation has the potential to do significant harm to investment advisory businesses. Adding another layer of regulation increases the financial burden on small-business owners like me. In fact, the Boston Consulting Group study found that funding an SRO is expected to cost the average independent advisor more than $50,000 a year — an oppressive price tag for most financial advisory firms. There are far more effective alternatives for enhancing consumer protection than adding a new regulator over the many small investment advisory businesses that provide independent and transparent advice to consumers under the fiduciary standard.

I am writing today to urge you to consider more-effective alternatives to enhance the SEC’s ability to oversee investment advisors. I urge you to request that the SEC study the user fee option, as well as work with investment advisers to study ways to improve both the efficacy and the SEC’s efficiencies in undertaking exams.

Should you desire to learn more about this ill-advised legislation, I urge you to consult this article by Professor Ron A. Rhoades at RIABiz.com. As seen therein, Congress should consider disbanding FINRA and transferring its functions back to the SEC.

Thank you for this opportunity to provide input. I believe that by working together, the investment advisory industry, Congress and the SEC can protect investors while not placing unreasonable regulatory burdens on advisors.

[Your Name]


[Your Name]
[Street Address]
[City, Street, ZIP Code]

[DATE, 2012]

[Recipient Name — i.e., member of Congress]
[Company Name]
[Street Address]
[City, Street, ZIP Code]

RE: The Investment Adviser Oversight Act of 2012

Dear [Recipient Name]:

As a consumer of investment and financial services from a small business — a registered investment adviser firm — I am alarmed at the prospect of legislation which will have the effect of putting my investment adviser out of business.

I urge you to prevent FINRA and its dominating members — large Wall Street firms (which were the primary causes of the 2008-9 financial crisis, and which the government was forced to bail out with taxpayer funds) — from being successful in this power grab. Broker-dealer firms should not be empowered to stamp out their competition. Simply because I (and many others) prefer to deal with a firm that embraces a true fiduciary standard, and by acting in my best interests thereby denies Wall Street its high profits — does not mean that Congress should empower FINRA to take over registered investment adviser firms (and consequently diminish that standard of conduct, as FINRA has long taken a position in opposition to fiduciary duties).

Moreover, FINRA should not be permitted to impose annual fees and costs of $50,000 or more a year on the average firm — an expense which would result in higher fees and costs for consumers like me.

Please vote in opposition to The Investment Adviser Oversight Act of 2012. As registered investment advisers will tell you, there are far better ways to address the need to ensure adequate oversight of fiduciary investment advisers.

Thank you for this opportunity to provide input.

[Your Name]


Each and every time FINRA CEO Rick Ketchum speaks of a “new federal fiduciary standard” or “uniform fiduciary standard,” it becomes more and more obvious that the “new standard” FINRA embraces is not a true fiduciary standard at all.

Here is the “Fiduciary Oath” which FINRA’s Rick Ketchum would never commit FINRA members to observe:

“I, as an investment adviser (firm or representative), shall always act with due care. In connection therewith (and not by way of limitation), I possess a fiduciary duty to each of my clients to exercise with good judgment, knowledge and due diligence as to the investment strategies, the investment products, and the matching of those strategies to meet the needs and objectives of the client, and to undertake these obligations with that degree of care ordinarily possessed and exercised in similar situations by a competent professional properly practicing in his or her field.

“I shall maintain the confidentiality of my client’s private and personal information in accordance with applicable law and the agreement with the client.

“I shall abide by my fiduciary duty of loyalty to each client at all times during the course of the relationship with the client. In connection therewith (and not by way of limitation): (1) I shall at all times place and maintain my client’s best interests first and paramount to those of me (or my firm); (2) I shall not, through either false statement nor through omission, mislead his or her or its clients; and (3) I shall affirmatively provide full and fair disclosure of all material facts to my client prior to the client’s decision on a recommended course of action, including but not limited to: (a) all fees and costs associated with any investment, securities and insurance products recommended to a client, expressed with specificity for the particular transaction contemplated; and (b) all of the material benefits, fees and any other material compensation paid to the advisor (and additionally those benefits, fees and other material compensation paid to the advisor representative) or to any firm or person with whom he or she or it may be affiliated, expressed with specificity for the particular transaction which is contemplated.

“I acknowledge that I am under an affirmative obligation to reasonably avoid conflicts of interest which would impair the independent and objective advice rendered to my clients. As to any remaining conflicts of interest which are not reasonably avoided, I shall undertake full and affirmative disclosure of such conflict of interest in a manner which ensures client understanding of the conflict of interest and its ramifications. I shall furthermore ensure that the intelligent, independent and informed consent of my client is obtained with regard thereto. In any event, any proposed conflict of interest which is not avoided should be prudently managed in order that the client’s best interests are preserved and that the proposed arrangement is substantively fair to the client.

“I shall act all times with utmost good faith toward my client. Not by way of limitation thereof, I shall not act recklessly, nor shall I act with conscious disregard of any client’s interests. I will be honest and candid with my client at all times.

“I shall not seek to switch from fiduciary to non-fiduciary status, with respect to a client, if any financial or investment advice of any nature is to be continued to be provided. However, my firm may provide execution-only services, under a client-directed brokerage account, but again only if I am no longer the advisor to the client, now or in the foreseeable future.”

Ron A. Rhoades, JD, CFP® is program director of the financial planning program at Alfred State College, Alfred, N.Y. A frequent writer on the fiduciary duties of registered investment advisers and financial planners, he was awarded the 2011 Tamar Frankel Fiduciary of the Year award for “changing the nature of the fiduciary debate in Washington.” Ron was recently named chairman-elect of the National Association of Personal Financial Advisors (www.napfa.org), the nation’s leading professional association for fee-only financial advisors. Professor Rhoades is also a Steering Group member for The Committee for the Fiduciary Standard (www.thefiduciarystandard.org), a member of the Financial Planning Association, and a certified financial planner. The views expressed herein are those of Ron A. Rhoades and may not necessarily be the views of any organization with whom Ron is affiliated. Ron may be contacted at RhoadeRA@AlfredState.edu.

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Stephen Winks

May 31, 2012 — 11:56 PM

to finish my comment….

, how can FINRA be considered an advocate for the consumer’s best interest in advisory services, when the brokerage industry’s interest are counter to that of the advisor ?

If it is true that no one in Washington expects the SEC to receive further funding, wouldn’t the bureaucracy then have to do more with less (which implies management skill) thus interjecting the need for modernity which assures a better regulatory outcome at a lower cost ? If so, then an expert authenticated prudent process that assures compliance to fiduciary standing at a fraction of the cost of present day compliance (10% to 15% of gross industry revenues) answers the perplexing questions of the cost and effectivenes of regulation.

Ron Rhoades as NAPFA President has a platform from which to make it clear that FINRA has no idea of how advisory services can be more effectively regulated at a far lower cost than even that envisioned by the Boston Consulting Group.

By raising the question of FINRA accountability for cost and effectiveness, there no case to be made for FINRA as an advisory services regulator. FINRA’s own people acknowledge, if FINRA does not regulate advisory services, its reason for being is significantly narrowed rather than exponentially expanded.




June 3, 2012 — 6:31 PM

Ron is not overstating the potential dangers to our economy and values if this legislation is passed and the trend of the Wall Street/Washington, D.C. relationships continue.

Elmer’s comments are interesting but keep in mind that FINRA has countless regulations. Virtually all are in their favor and, by design, very complicated to minimize fighting back.

Steve is correct in that it is a fight for Trust and Confidence. FINRA/NASD’s structure has never offered either, and most of its current and former leaders simply use those terms for marketing purposes.

Ron Rhoades

Ron Rhoades

May 30, 2012 — 6:17 PM

No one denies that the SEC needs more funding, and a wiser exam strategy. But putting FINRA in charge of RIAs creates 1,000 problems as it purportedly tries to solve one.

Putting FINRA in charge of RIAs is like putting ENRON in charge of CPAs. It’s like drug companies setting the rules for your family physician. On so many levels, it’s just nonsensical.

Elmer Rich

Elmer Rich

May 30, 2012 — 4:43 PM

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.

Stephen Winks

Stephen Winks

May 31, 2012 — 4:18 PM

This is a fight for the Trust and Confidence of the investing public where there is no counter arguement in public policy where literally the assurance of the best interest of the investing public is the purpose of investment policy.

When it is so clear that FINRA (formerly the National Association of Securities Dealers) has been the benefactor of the brokerage industry where the broker is officially neither accountable nor responsible for their recommendations



October 14, 2013 — 11:15 AM

Just at this time, heavy water fog, suddenly on shrinking, all incomes inside that figure body, rear a Gao Da Dun Shen’s form.

Elmer Rich III

Elmer Rich III

October 14, 2013 — 4:23 PM

More of a risk seems the lack of succession planning in an industry where “life-style” practices are the norm.

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