I wrote a 15-page report on our deliberations, available to anybody who asks me for it. But the chain of logic is not hard to follow. Brokerage firms have been losing market share to independent RIAs for decades. Since the 2008 market disaster, scandals, bailouts, bankruptcies and forced sales, this erosion has accelerated - reinforced by an exodus of top brokers who see how good it is working where nobody tells you what to sell.
The leaders of these firms are smart enough to see the threat to their business model. We concluded that they'd use every possible resource to stop the bleeding. To survive, they would need to eliminate the pesky fiduciary RIA competition - those who make it possible for consumers to have a choice about where to get their financial advice.
That's when we all looked at each other and realized that our cherished, still-fragile profession was in the crosshairs of the most powerful industry in the global economy.
Were we being paranoid? Or is our profession in actual danger of extinction? As we talked, we realized we've been watching Wall Street orchestrate our demise for years. The Republican leadership in Congress has proposed that the SEC authorize one or more self-regulatory organizations to take over regulation of RIAs. This has been coordinated with massive Wall Street lobbying and with FINRA's public assertions that it really wants the job.
You know that the Wall Street brokerage firms control FINRA through their seats on its board of directors. Some might see a pattern here. The plan, quite simply, is for FINRA to take over regulatory supervision of RIAs.
WHAT TO EXPECT
Most advisors regard potential FINRA regulation as, at worst, an annoyance. But as the leadership forum participants looked at how FINRA regulation of RIAs might work in the real world, the picture became more alarming. A securities attorney pointed out that FINRA examiners have no experience with the fiduciary business model. They're accustomed to imposing a lot of procedural hurdles and burdens on how you run your business, and the whole independent RIA mind-set of, "It's good if it benefits my clients," would no longer be tolerated.
Under FINRA, you'd pay for the privilege of being regulated. How much? Those with direct experience with FINRA estimated that self-regulatory membership would run at least $15,000 a year for smaller firms, more for larger ones.
It gets worse. We were told that FINRA examiners are much quicker to bring enforcement action and hold on-the-record hearings when they find something they don't like or don't understand - unlike the SEC, which usually handles non-criminal activities with a deficiency letter. When enforcement is involved, so too are legal expenses.
So let's imagine that FINRA achieves its regulatory ambitions. Now a bureaucrat has to pre-review every piece of correspondence you send, which may take weeks or months. You've paid your $15,000 (or more), set aside $100,000 to meet a new net capital requirement and stopped communicating with your clients unless absolutely necessary. You now devote half your time to paperwork.
FINRA inspectors knock on your door. What you don't yet know is that the FINRA board has decided firms like yours are a pest. They've brainstormed - in secret, in board meetings held entirely outside public view - a number of creative ways to find fault during the RIA inspection process. This ties you up in expensive litigation. There are accounts of your "regulatory problems" in the local newspaper.
Meanwhile, FINRA is sending out press releases saying its zealous enforcement is "cleaning up the mess left by the SEC," and that the organization is being "hyper-vigilant about protecting the public in this post-Madoff world ... bringing a breath of fresh air to consumer protection."
How long do you think you'll be in business after your second annual inspection? How long do you think Wall Street's primary competitor will survive under these (entirely plausible) conditions? In my report, I call this "regulatory Armageddon."
