The Financial Industry Regulatory Authority tried to jump to the head of the line of potential candidates to oversee the financial investment industry's independent brokers and advisors, based on the chairman's comments at a Congressional hearing today.
Richard Ketchum, chairman and CEO of Finra, said the agency would be very capable of setting up a separate unit to oversee independent investment advisors.
"We (Finra) would establish a separate entity with a separate board and committee governance to oversee any advisor work, and would plan to hire additional staff with expertise and leadership in the advisor area," said Ketchum, who testified at a Financial Services Committee hearing this morning in Washington D.C., on a bill proposed by Rep. Spencer Bachus, (R-Ala.), that would set up one or more self-regulatory organizations (SROs) for registered investment advisors (RIAs).
William Dwyer, president of LPL Financial and chairman of the Financial Services Institute, seconded the Finra motion and exhorted the Securities and Exchange Commission to establish a uniform fiduciary standard and retain Finra as an SRO to oversee RIAs, putting them under the same SRO that currently monitors independent brokers.
"Now more than ever, individual investors need to have confidence in the reliability of the investment advice they receive," Dwyer said. "Americans need and want advice from trustworthy professionals. If investors lose access to their trusted advisors, or lose confidence in them, the nation's entire economy will suffer."
However, not everyone on Tuesday's panel was ready to jump on the Finra bandwagon.
David Tittsworth, executive director and executive vice president of the Investment Advisor Association, said the organization, which exclusively represents SEC-registered investment advisors, doesn't want an SRO. "Our position has been that we support regulation and oversight of investment advisors by the SEC," Tittsworth said. "It's a single, governmental regulator accountable to Congress and the public that has investors' protection as its paramount mission."
Tittsworth said regulatory oversight of independent advisors shouldn't be outsourced from the SEC to another group such as Finra.
"We've noted various concerns about Finra and self-regulatory organizations, including their lack of accountability, their lack of transparency, questionable track record, excessive costs and their bias favoring the broker-dealer regulatory model," he said.
The Financial Planning Coalition, in a statement provided to the committee, said creating a new SRO to monitor independent brokers and RIAs isn't needed. "At a time when the Administration and Congress are working to find ways to create jobs, stimulate economic growth and cut red tape, the creation of a new SRO is an overly broad approach to correcting the narrow problem of the inadequate frequency of examinations of SEC-registered investment advisers," the statement said.
The coalition believes that supporting enhanced SEC oversight is the most appropriate solution.
"We strongly believe the SEC (and the states) is the appropriate regulator of investment advisors," the coalition stressed. "We do not believe there is sufficient reason for a change in the policy of direct federal regulation that has largely been effective for such an extended period of time in favor of a costly outsourcing of investment adviser oversight."
Under a draft bill by Bachus, the committee chairman, one or more self-regulatory organizations would oversee U.S.-registered retail investment advisors. Bachus introduced his bill to the committee on Sept. 8.
Bachus said that under the SEC's current monitoring system, investors who use independent financial advisors may not be sure whether they're getting certified and qualified financial investment advice because the SEC on average only reviews such advisor groups only once every ten years.
Bachus' bill proposes that the SEC have the power to hire a group to monitor, evaluate and certify such brokers and advisors. His draft says that independent advisors would have to be members of a single regulatory organization (SRO) that would report directly to the SEC.
Last year's Dodd-Frank act directed the SEC to look into the practices of financial advisors in the wake of the 2008 credit crisis and high-profile frauds such as the Bernard Madoff Ponzi scheme.
The SEC conducted a study that concluded the regulator needs to fix its inability to inspect a sufficient number of investment advisors on a regular basis. The report presented a few options, including using new SEC fees to pay for an expanded inspections program or moving investment advisors under a SRO.Some panel members favor adopting a higher and consistent standard for all advisors, and noted the public frequently is unable to tell the difference between types of investment advice, as noted by the SEC. Broker-dealers are now held to a "suitability" standard, which only requires brokers to recommend a product consistent with their clients' goals, strategies and risk tolerance. Under a fiduciary standard, a broker would have to show that the investment is the best choice for the client.
"Regulatory standards in this area are notably weak and inconsistent, promoting investor confusion and setting an unreasonably low bar for professional conduct," testified Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America.
IAA's Tittsworth said the the association would like to see advisor user-fee legislation drafted that would require investment advisors to pay fees to enhance oversight by the SEC of investment advisors. "We're willing to pay our (user fee) fair share; we don't think it should be an open-ended check and we'd like to see some checks and balances."
Tittsworth said the number of SEC-registered advisors is projected to shrink roughly 20% next year, from 11,500 to 9,000. That will help shorten the SEC window for inspecting RIA firms, as many smaller RIA firms will be regulated by the states.
Under that scenario, Tittsworth said, the SEC will be doing an estimated 1,500 examinations a year; that cuts the inspection time frame to once every six years from once every ten years. "That's a significant improvement over what they're doing now," he said.- Jim McConville