House Financial Services Chairman Spencer Bachus is scheduled to hold a hearing on June 6th on a bill that will hurt small business owners who provide sound financial planning to consumers and who put their clients’ interests first. The National Association of Personal Financial Advisors (NAPFA), registered investment advisers (RIAs), and the American public should be very alarmed at the damage HR 4624 would do. NAPFA believes consumers will lose access to trusted advice and gain access to salesmen who supply confusing, conflicted advice.
The proposed Investment Adviser Oversight Act of 2012 is written as a plug and socket for FINRA to apply for and become the Self Regulatory Organization (SRO). The appropriate place for the regulation of RIAs remains the Securities and Exchange Commission (SEC), which has directly overseen RIAs for over seven decades. Rather than adding FINRA’s cumbersome and expensive bureaucracy, the SEC should revise its examination programs to make them more efficient and focused. Congress should authorize the SEC to impose reasonable user fees on RIAs to increase the frequency of its examination program.
Four major flaws in the proposed legislation:
First, a FINRA SRO for RIAs would have no experience overseeing advisors who adhere to the higher fiduciary standard of conduct. In contrast, FINRA’s member broker-dealer firms only adhere to the weak suitability standard, which fails to protect consumer interests. RIAs are proud of their obligation to put their client’s interests first. FINRA has long opposed the application of a true fiduciary standard, and for over seven decades has resisted all attempts to raise the standards of its broker-dealer members. Permitting FINRA to oversee RIAs would be like permitting Enron to establish the accounting standards which CPAs must follow.
Second, under the proposed legislation the term “self-regulatory organization” becomes meaningless. With a FINRA SRO, independent small financial advisors would not be regulated by their own professional leaders. Rather, RIAs would likely be overseen by the conflicted Wall Street broker-dealers with which they compete and from which they have fought to remain separate.
Third, both state-registered and SEC-registered advisors will be forced to join a FINRA SRO, adding an unnecessary layer of bureaucracy and mandatory registration fees. These additional compliance burdens and high annual fees will hurt mom & pop investment advisory firms the most. Many small, independent investment advisory firms would be put out of business as a result of these burdens. Others would have to substantially raise fees to their clients to remain in business. American consumers would be denied access to affordable investment and financial advice provided in each consumer’s best interest.
Fourth, FINRA is shrouded in secrecy regarding its books and records, and refuses to conduct meetings which are open to the public. While FINRA acts like a government authority, it is not accountable to Congress, not subject to the Sunshine Law, and not required to adhere to the Freedom of Information Act. If the bill is enacted, RIAs would be forced to answer to a board of Wall Street insiders who would preserve the high profits of the Wall Street broker-dealer firms and protect their own million-dollar compensation packages.
No wonder that RIAs rejected FINRA oversight by an estimated 80%, according to a December 2011 Boston Consulting Group (BCG) survey.
There is a better solution: Congress should instead permit the SEC to enhance its examination and inspection program, with additional funding provided by reasonable user fees imposed upon RIAs. Consumers understand that building a new layer of untested bureaucracy is backwards at best, and that working towards an economical, accountable, and transparent solution would protect them far better.
Economical: The BCG’s December 2011 Economic Analysis estimated that the amount it would cost to provide enhanced examinations through the SEC would be a less than twice the cost of FINRA SRO user fees. User fees would be restricted only to recover the cost of increased examinations and inspections and be reviewed and adjusted annually.
Accountable: Unlike FINRA, the SEC is accountable to Congress. Congressional oversight would assure that fees are reasonable and flow only to enhancing the examination process.
Transparent: Unlike FINRA, the SEC is subject, as a government entity, to both the Sunshine Law and the Open Meetings Act. Unlike FINRA with its opaque finances and secret rule-making, the SEC must open its books and allow representatives of the public trust to attend appropriate meetings.
In conclusion: NAPFA opposes the proposed legislation and FINRA’s power grad on behalf of its Wall Street member firms to deny consumers access to independent, objective investment advice. We don’t need Wall Street’s conflicted broker-dealer member organization to oversee RIAs. Oversight of registered investment advisers should remain with the SEC, and the SEC’s examination programs should be enhanced through reasonable user fees.
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