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RIA Industry Still Fearful of FINRA Incursion

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WASHINGTON -- Even though FINRA CEO Richard Ketchum has ruled out pursuing jurisdiction in the advisor arena, RIA industry representatives remain worried the regulator is actively looking for a reason to get involved.

At TD Ameritrade Institutional's advocacy summit, several officials raised the concern that it will only take one major scandal to force the issue of expanding advisor exams. When that happens, policymakers aren't likely to adopt any framework that the industry could support, but could instead turn examination authority over FINRA, which some view as the least desirable outcome.

"This is the premise: you're one crisis away," says Neil Baritz, co-founder of the law firm Baritz & Colman, where he specializes in corporate and securities law.

FINRA vigorously disputes that contention, though the group acknowledges that the shortfall in advisor exams remains a cause for concern. (At current levels, a given advisory practice is visited by an SEC examiner on average of once every 11 years.)

"As we have stated repeatedly, FINRA is not pursuing regulatory oversight of investment advisors," says FINRA spokeswoman Michelle Ong. "However, we believe a gap in regulatory examination of investment advisors still exists and needs to be filled to protect investors."

It is also worth noting that regulation of investment advisors dropped off of the activities listed on FINRA's lobbying disclosure forms in the first quarter of 2013, when Ketchum announced the group was abandoning its campaign to oversee advisors.


Momentum had seemed to be building for FINRA to enter into the advisor sector, when lawmakers were weighing legislation that would authorize the SEC to deputize one or more self-regulatory organizations to help with RIA exams. Most observers believed that FINRA would be the obvious choice.

That proposal was deeply alarming to some RIA advocates, who raised objections about FINRA's transparency and accountability, the costs of FINRA's exam fees, and the perception the industry regulator is biased toward the brokerage model.

Groups like the Investment Adviser Association worked to counter that effort and gin up support for legislation that would grant the SEC the authority to collect user fees from advisors to fund the increased examinations.

Both of those efforts have stalled in Congress, though Neil Simon, the IAA's vice president for government relations, doesn't believe the fight is over just because the first round ended in a stalemate.

"FINRA has been anxious to extend their reach to investment advisors for a long time," Simon says. "They view investment advisors both as a regulatory and as a revenue opportunity."

The SEC has acknowledged that its oversight of advisors is insufficient, and has asked for more funding from Congress to beef up the Office of Compliance Inspections and Examinations.

That is an unlikely prospect in the current political climate, and authorizing a self-regulatory organization like FINRA to conduct exams or allowing the SEC to collect user fees would both require an act of Congress.

Those circumstances explain why the SEC has moved on to consider a new proposal of tapping a third-party organization to help with exams, while retaining its own oversight authority -- a model similar to certified accounting firms that audit publicly traded companies.

To achieve that, "Congress doesn't have to do anything," Simon notes.


The IAA objects to the proposal for a third party to evaluate RIAs on much the same grounds that it has opposed the SRO model -- namely that it is hoping to avoid an additional layer of regulation, and all the costs and complexities that might entail.

At the direction of SEC Chairman Mary Jo White, commission staffers have been working on a draft proposal, which Simon expects to move forward in fairly short order, despite the efforts of his group and others to beat back that effort.

"I do think the SEC is going to proceed," he says. "Whether it happens this year or the first quarter of next year, it will proceed by rulemaking, and it's going to be essential that all of us in this room and our colleagues elsewhere get involved in the discussion, in the fight."

An alternative proposal generating some interest in the industry involves raising the threshold for SEC registration above the current $100 million AUM mark, which would channel more advisors to state oversight.

Tom Nally, president of TD Ameritrade Institutional, takes a pragmatic view of the examination debate. Acknowledging that the 11-year exam cycle does not reflect well on an industry that tries to present itself as one that is well-regulated and consistently acts in the best interests of investors, Nally suggests that third-party exams could be a boon to the RIA sector, provided they didn't entail a major new compliance burden in the form of a complex new set of audits that depart from the SEC model.

"We can sit and wait and do nothing, or we can embrace the idea of third-party examinations, which would at least take that once every 11 years off the table," Nally says.

"When that next Bernie Madoff pops up -- then it's going to be FINRA knocking on everyone's door, and it seems like nobody wants to see that, so something's probably better than nothing, at least in the short term."

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