ARLINGTON, Va. -- Even after repeated assurances from FINRA that it is no longer actively pursuing regulatory authority over investment advisors, some advisor advocates aren't buying it.
Count among those Neil Simon, vice president for regulatory affairs at the Investment Adviser Association.
Simon, speaking Thursday at the IAA's annual regulatory and compliance conference, charged that FINRA continues to view oversight of advisors as a "regulatory and a revenue opportunity."
"I don't think FINRA has surrendered its long-held goal of gaining authority over us," Simon said.
A FINRA representative disputed Simon's characterization of the organization's position, but declined to comment on the record for this story.
FINRA in the past has lobbied for legislation that would have positioned it to become an industry regulator in the RIA space, expanding its authority beyond broker-dealers, but last year the group said it was dropping that effort. Critics of that push have warned that FINRA's broker-style regulation would be an awkward fit for advisors.
"I live in fear, quite honestly, of FINRA assuming the responsibility of examining investment advisors," said Stephanie Monaco, a partner at the law firm Mayer Brown who previously served as an attorney at the SEC.
"They're very, very specialized, very skilled individuals," she said. "They are truly wonderful broker-dealer people. But we are investment advisors. And I have found in my 30-plus years of practice there's different wiring. Broker-dealer people think one way, investment management people think and do differently, and I am very concerned that if you try to rewire the broker-dealer examination staff at FINRA, then all of a sudden investment advisor activities would be measured against broker-dealer standards."
Simon recalled an interview FINRA Chairman and CEO Richard Ketchum gave to the Wall Street Journal last year, telling the paper of his group's efforts to win oversight of advisors: "We are not pursuing it at the present time." Simon seized on the last four words of that statement, suggesting that FINRA still has designs on expanding its authority.
The debate over what role FINRA -- or another regulatory organization -- should play in examining advisors stems from concerns that the SEC, at its current funding level, lacks the capacity to effectively police the industry. The commission has said as much, noting in its most recent budget request that it only examined 10% of registered advisors last year, and that some 40% of registered advisors have never been examined. The agency is appealing for funds to hire an additional 225 examiners.
That the shortfall is problematic is generally agreed upon in Washington, even if there are deep divisions over an appropriate remedy.
"There is a sense by policymakers that something needs to be done," Simon said. "There is a broadening perception that the existing oversight of advisors is not sufficient."
Simon's organization has been trying to drum up support for legislation that would authorize the SEC to collect fees from advisors to fund a more rigorous examination program. But the so-called user-fee legislation has failed to advance in the House, and, while the IAA, the Financial Planning Association and other groups have been looking for bipartisan sponsors in the Senate, that effort has been an uphill climb, Simon acknowledged.
There is no consensus within the SEC for how to address advisor oversight. Both the user-fee proposal and the idea of tapping FINRA or some other self-regulatory organization to examine advisory practices would require an act of Congress. But last year, Commissioner Daniel Gallagher floated the idea of the SEC acting on its own authority to require advisors to engage a third party, such as an accounting or auditing firm, to review their practices.
INACTION IN CONGRESS
SEC Chairman Mary Jo White has directed a staff evaluation of that proposal, but has not publically endorsed it, so it's far too early to tell where it might go or what form it might take.
"There's no flesh on those bones at this point, so what it would look like, we can only speculate at this point," Simon said.
However, he worries that inaction in Congress on the user-fee bill -- or the SRO proposal that his group opposes, for that matter -- would leave the matter in the hands of the SEC, and momentum could build behind Gallagher's third-party proposal, since the commission could achieve that under its own rulemaking authority.
Should that scenario unfold, he imagines that FINRA could very well emerge as the third party that handles the bulk of advisor exams, the very outcome the IAA has been railing against throughout the SRO debate.
"Congress is very, very good at doing nothing," Simon said. "My fear is that it will gain some traction because Congress is unlikely to give the SEC the money it needs to properly staff up [the Office of Compliance Inspections and Examinations], and because despite our advocacy of the user-fee notion, it's just not gaining bipartisan support."
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