WASHINGTON -- FINRA may have dropped its lobbying campaign for legislation to expand oversight of investment advisors, but the industry regulator is interested in a new proposal from one SEC commissioner to beef up examinations of the RIA industry.

In a meeting with reporters on the sidelines of FINRA's annual conference, Richard Ketchum, chairman and CEO of the self-regulatory organization, praised SEC Commissioner Daniel Gallagher for floating the idea of the commission acting on its own to tap an outside organization to help in the review of advisory practices, though he stopped short of endorsing what is still a very preliminary concept.


"This is his proposal, not ours. I applaud that he's looking at trying to fill a gap that we think is there, and we'll look carefully at what comes out of this if the commission pursues it," Ketchum said on Tuesday.

Just minutes earlier, Ketchum was sitting on the main stage at FINRA's conference with Commissioner Gallagher, where both lamented the shortfall of the SEC's RIA examination program. With limited resources and more than 11,000 registrants under the commission's purview, firms commonly go years without an examination.

At a separate industry conference last week Brian Hamburger, founder of compliance consultancy MarketCounsel, suggested that the period between routine examinations is even longer than the SEC says. "The SEC likes to say they examine advisors every seven years, but you do the math…and it's not every seven years," he told advisors. According to Hamburger, advisors "get hit" with a routine exam closer to every 10 to 12 years.


In the past, FINRA has been vocal in its calls on Congress to address the issue, including supporting legislation that would pave the way for one or more SROs to assume oversight of advisors.

Had such a bill become law (it didn't come close), FINRA would have been the odds-on favorite to begin regulating advisors in a similar manner as it does broker-dealers. That prospect rankled many in the advisory industry.

Politically, the issue has stalled, and FINRA's chief has said his organization is giving up the fight, at least on the Hill. "We're not planning to go to Congress and ask for changes in legislation," Ketchum reiterated on Tuesday.


But Gallagher's idea is for the SEC to act independently of Congress. Through its own rulemaking authority, the commission could compel advisors to enlist a third party -- such as an auditor, exchange, or potentially an SRO like FINRA -- to review its practice.

Unlike the earlier legislative proposal, however, it appears that under Gallagher's proposal advisors' interactions with the third party would be limited to the review, so they would not have to become full members of an SRO with enforcement and rulemaking authorities, as brokers are with FINRA.

Gallagher acknowledged that his plan is sketchy on the details at this early stage, though he and Ketchum both see it as a shorter path to increasing oversight of advisors than working to push legislation through a gridlocked Congress in an election year.


"We haven't changed our basic view, which is there's a huge disparity in oversight with respect to investment advisors. And it's not an okay environment where you can go decades without being examined, and that creates risk for investors. That's not appropriate," Ketchum said.

"I think the idea of the commission delegating responsibility -- whether it be to SROs or other entities that they find a way to effectively do oversight over -- and differentiating between examination responsibility and enforcement, interpretation and rulemaking authority, I thought was creative and well worth reviewing," he added. "But in the end that's a decision for the commission, not for FINRA."

Read more:

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access