This is a deliberate attempt to obscure the fact that the Dodd-Frank measure was passed, not because of anything that mainstream (dually registered or otherwise) RIAs did, but because an outraged public wanted more oversight over an entirely different group of "advisors." The brokerage community had just brought the global economic system to the brink of collapse with its reckless sale of junk mortgage pools and derivative bets on them. The "regulatory gaps" the bill is addressing had nothing to do with RIAs; it was the fact that somehow the wirehouse community had been able to rake in billions while their investors suffered, and then demand taxpayer-sponsored bailouts when their own balance sheets were threatened.
Here's a good one: "From a business standpoint, retail investment advisors have an unfair advantage over independent broker-dealers, who are examined by FINRA every two years. Broker-dealers are more than willing to spend time and money preparing for and complying with these frequent examinations because they help ensure consumers are protected and have peace of mind. Yet, if RIAs do not have to spend this time with examinations, or spend the resources to show they are compliant, they gain an unfair business advantage."
If you're an RIA, did you realize that you don't have to prepare for these exams, which may arrive at any moment? Didn't anybody inform you that you're just totally footloose and compliance-free? The broker-dealers are the heroes here; they embrace more compliance-related chores on behalf of the consumer. What the memo doesn't mention is that they fight like hell to avoid having to live up to a fiduciary standard. In the fantasy world of this memorandum, consumers can have "peace of mind" knowing that their brokerage firm is watching over their best interests, supervised by these more frequent examinations. All of you RIAs are getting a free pass - which has to stop.
THE REAL COSTS
The memo says that members should tell their legislators that FSI endorses FINRA to be the SRO for RIAs, and that FINRA's estimates for the cost of FINRA regulation should be taken more seriously than the much more alarming figures in a Boston Consulting Group study. The FINRA press release endorsed so strongly here is nowhere near as detailed as the Boston Consulting report, and was released only after FINRA had refused for months to give its own estimates.
Ironically, FSI's message went out right as FINRA was raising its service fees to existing member organizations, which already feel like they're crushed under mountains of paperwork and expense. A recent article in the trade press questioned whether smaller broker-dealers will be able to survive all the busywork that they have to deal with, and I would challenge anybody to show me how consumers are any safer as a result.
I think we all know that FINRA regulation of RIA activities would be pretty darned expensive. If you harbor any other expectation, I suggest you have an off-the-record conversation with any senior executive at any independent broker-dealer.
But my larger point centers on why this cynical memo bothers me so much. The RIA community had nothing to do with the ugly problems in 2008, not even Bernie Madoff, who was an NASD (as FINRA was known then) board member, who was regulated by FINRA for his entire Ponzi career. The RIA community has a squeaky-clean record compared with the brokerage operations, in part because the RIA community is held to a higher legal standard, one that any person who wants to cheat his customers will think twice about embracing.
Perhaps most important, the independent broker-dealers were not part of these scandals either. And yet their trade organization is trying, with uncommon persistence, to bring the regulatory organization that threatens their own viability ever deeper into the lives of their affiliated advisors. Why?
WHOSE BENEFIT?
It has always been clear to me that FINRA exists to benefit the larger brokerage firms, and its rules and regulations and enforcement are used to create an environment where anybody who competes with the likes of BofA Merrill Lynch, Morgan Stanley, etc., has to do so under duress. FINRA has been an effective bludgeon against the small independent B-D world, creating paperwork requirements whose costs are best amortized over larger hordes of retail advisors. The organization routinely prosecutes and punishes smaller B-D executives for activities far less damaging than all the stuff the brokerage firms did leading up to 2008. The brokerage executives are never prosecuted directly, and their firms, unlike the smaller B-Ds whenever they commit a foot-fault or trip over yet another regulatory hurdle, never have to admit guilt for what they did.
