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FINRA Exec Looks to Ease Advisors' Worries on SRO

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WASHINGTON -- A senior executive with FINRA sought to tamp down the concerns that many investment advisors have raised about empowering the self-regulatory organization with oversight of the sector, pledging Wednesday that significant reforms would accompany any such transition.

In an address here at the Financial Services Institute's (FSI) annual Advocacy Summit, FINRA Vice Chairman Steve Luparello explained that the organization is mindful of the nuances that distinguish the investment advisor sector from the broker-dealers currently under its purview.

"When discussion moves to whether FINRA should be the SRO for investment advisors the talking points of opposition are simple: FINRA's not qualified because it only regulates broker-dealers and therefore doesn't understand the differences between the two models. They believe the IA would be forced to live under a broker-dealer regime. That's just simply wrong," Luparello said.

"We agree that there are important differences between the broker-dealer and investment advisor communities. Any entity that would be empowered to oversee IAs would need to recognize that and regulate accordingly," he added. "We would not force broker-dealer requirements on investment advisors."

The push for vesting an SRO with expanded oversight comes in response to concerns that the SEC and the states, each with jurisdiction over a subset of the industry, lack sufficient resources to maintain a rigorous examination program. In 2010, just 9% of investment advisors registered with the SEC were subjected to an examination, Luparello noted.

"Authorizing an SRO to examine investment advisors is the most practical and effective way to close the regulatory gap in oversight between broker-dealers and investment advisors," he said. "The gap in investment advisor oversight is a significant void in protection of advisory clients and should be addressed as quickly as possible."

The Dodd-Frank financial reform law enacted last year directed the SEC to undertake a study to inform recommendations for enhancing regulation of investment advisors. In the time since, a vigorous policy debate has taken shape, with groups like the Investment Adviser Association and the organization that represents state regulators voicing strong opposition to an SRO, be it FINRA or another entity.

The FSI, meanwhile, on Wednesday is dispatching its members in town for the summit to Capitol Hill to appeal to lawmakers to support legislation that would empower FINRA to oversee investment advisors.

One such bill has emerged in the form of draft language circulated last month by House Financial Services Committee Chairman Spencer Bachus (R-Ala.). FSI members plan to meet with the offices of more than 260 representatives and senators today, and on the SRO issue, they are working alongside FINRA to press their case.

Luparello indicated that FINRA envisions its role as a regulator of investment advisors as subordinate to the SEC, which would remain the ultimate authority in the sector. FINRA would have only limited rulemaking power.

Critics of vesting FINRA with oversight of advisors have expressed concerns that the channel would be underrepresented in the organizational structure. Luparello offered an assurance that if it is granted the authority it seeks, FINRA would undergo a reorganization to give due representation to the advisor community.

"If FINRA becomes the SRO for investment advisors our governance structure would have to change and it would have to reflect the investment advisor presence," he said, adding that that would most likely entail the creation of a separate affiliate with its own board.

Other objections have centered on the expertise within FINRA. The concern is that examiners who are steeped in the broker-dealer model would make a clumsy transition to the investment advisor sector, with the unintended consequences of poor oversight and burdensome compliance procedures.

"Here at least I think that we have to admit that they have something of a point," Luparello allowed. "We would need to hire additional staff, especially those with additional expertise and leadership in the advisory industry, and implement a rigorous training program for the existing FINRA employees to ensure that the examiner corps are up to speed on the differences. That said, we're obviously not novices at the creation and operation of examination programs."



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