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Can FSI find common ground in a new political environment?

NEW ORLEANS — A new FINRA program landed with a thud at FSI’s conference just as the independent broker-dealer trade group was adjusting to a changed political landscape.

With an eye toward enforcing share-class suitability, the regulator is allowing firms to self-report potential breaches of their supervisory duties in advisors’ recommendations of 529 savings plans. FSI views the program as an example of “rulemaking by enforcement,” though FINRA denies it’s a new rule.

529 plan assets

However, FSI CEO Dale Brown and the organization’s newly installed board vowed to keep a constructive dialogue with regulators and lawmakers at all levels. The board approved an eight-part agenda for 2019 after Democrats took over majority control of the House of Representatives.

Fiduciary rule advocate Rep. Maxine Waters, D-Calif., now leads the Financial Services Committee, which also has self-described democratic socialist Rep. Alexandria Ocasio-Cortez, D-N.Y., among its members. But Waters has “always had an open door for us over the years,” Brown said at a media roundtable.

“For all of our 15 years, we’ve made it a priority to work with everyone that the American people elect to represent them. At the end of the day, access to advice for everyone and ensuring effective investor protection are not partisan issues,” Brown said. “There’s always a debate over how do you accomplish those objectives, but I think there’s lots of common ground.”

The FINRA self-reporting program involves the tax-advantaged municipal securities which have grown into a $329-billion market, according to the College Savings Plan Network. The federal tax overhaul also expanded the 529 plans into savings for tuition in grades K-12 starting last January.

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The regulator will waive any fines for firms who self-report potential supervisory violations by April 1 despite facing possible censure and restitution payments in doing so. FINRA’s “potential areas of concern” include training, discounts and review of sales data involving A-shares and C-shares with higher annual fees.

Citing the 529 program and a similar self-reporting effort by the SEC last year involving mutual-fund share classes as examples, Brown said FSI has to be consistently on watch against rulemaking by enforcement. John Rooney, a managing principal with Commonwealth Financial Network, agreed.

“We spend a lot of time endeavoring to play by the rules,” said Rooney, who also won election as the vice chair and 2020 chair of FSI. “It’s very frustrating to find out that they didn’t really lay out what the rules were.”

The regulator started the program to provide firms with information about deficiencies it has observed across the industry, according to FINRA Head of Enforcement Susan Schroeder. Settlements under the program will also not result in so-called statutory disqualification for additional sanctions against firms.

“A member firm’s responsibility to supervise suitability is a well-established obligation. This is not a new rule,” Schroeder said in an emailed statement, calling supervision of 529 recommendations “a well-known requirement regarding an investment that is significant for many families.”

Dale Brown FSI and Bari Havlik FINRA.jpg

High-risk brokers and cybersecurity, two other agenda items for FSI in 2019, display shared viewpoints between FINRA and the trade group of more than 100 firms with 160,000 advisors. FSI has also expressed support for the SEC’s proposed Regulation Best Interest, albeit with some suggested changes.

Waters also established a new subcommittee on Financial Services centering on diversity and inclusion, an issue which FSI has also focused on in recent years. On the other hand, she slammed the Trump administration for delaying the FSI-opposed fiduciary rule and criticized the SEC proposal.

The FSI platform includes retirement solutions “provided by the private sector” rather than government programs with automatic enrollment in IRAs for employees with no 401(k) plan. House Ways and Means Committee Chairman Richard Neal, D-Mass., introduced legislation requiring auto-IRAs in 2017.

FSI also placed a “level playing field between BDs and RIAs” and a “workable” best-interest standard of care among its priorities for 2019. The organization is pushing back against efforts at the state level to create their own guidelines resembling the now-vacated fiduciary rule.

Such state-level rules would add “confusion and cost,” according to Brown, and FSI General Counsel David Bellaire said the organization plans to “invest very significant resources” in making the case against them. The state guidelines wouldn’t put FSI members out of business, though, he added.

“Our members deal with a variety of different regulatory requirements in different states — whether that involves the kinds of designations they can use on business cards or other matters, our member firms have found ways to navigate,” Bellaire said. “I don’t think it’s our members that would be harmed, but it would be Americans who need professional advice.”

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