Things move slower than evolution when it comes to rulemaking in Washington, D.C., as the financial services industry has learned in recent years regarding such issues as the creation of a self-regulatory organization for registered investment advisors or crafting a uniform fiduciary standard of care for both RIAs and broker-dealers. And don’t expect that pokey pace to change any time soon.

“Absent a crisis that would prompt Congress to take action, I think we’re stuck with the status quo for a while,” Dale Brown, CEO of the Financial Services Institute, said yesterday during a gathering in Philadelphia. “It will likely be a case of nibbling at the margins.”

Brown spoke at Gladstone Associates’ annual conference focused on mergers, valuations and succession planning within the RIA space. As head of FSI, which represents more than 100 firms and 37,000 members among independent advisors and broker-dealers, Brown for the second consecutive year came to the conference to speak about the latest doings on the regulatory front.

And, like last year, he offered some predictions for the year.

Given the lack of movement in Washington regarding Dodd-Frank proposals and the like, Brown didn’t have much fodder to work with. Then again, that was the story.

Take, for example, the wrangling over a uniform fiduciary standard of care for both RIAs and broker-dealers. “Congress told the SEC in Dodd-Frank that it may do this rulemaking if it determines that it should,” Brown said. “And that’s where we are, and that’s why I think this can keeps getting kicked down the road for a couple of reasons.”

For starters, he said, it’s a very complex issue. In addition, there isn't a broad consensus on what a uniform standard of care should look like.

“FSI has taken the view that the SEC ought to be working on a uniform fiduciary standard of care under the securities laws that would levelize, if you will, the legal standard for everyone providing retail investment advice whether you’re on the broker-dealer or RIA side of the business.

“I think everyone in the industry agrees this would be a good thing in concept,” he continued. “What’s debatable is the details of how the principles of a fiduciary standard are translated into a rule that’s supposed to apply to a diverse industry from both a business model and regulatory standpoint.”

FSI’s stance is that a uniform fiduciary standard shouldn’t exclude the broker-dealer model of selling commissionable products in favor of the fee-based RIA model. Doing so, FSI says, would have unintended consequences because investors with smaller accounts often can’t afford to pay for fee-based service and would get squeezed out of getting investment and retirement advice.

Advocates of a uniform standard based on the current standard applied to RIAs decry what they say are the inherent conflicts of interest in commission-based sales, and they espouse the purity of the fee-based model.

Thus, the debate smolders. 

At last year’s Gladstone conference, Brown predicted that the SEC would enact a uniform fiduciary standard of care by year-end 2014. Yesterday, he pushed that back to the end of 2015.

SRO

Also last year, Brown predicted the Financial Industry Regulatory Authority would continue to expand its regulatory reach into RIA oversight, setting the stage for Congress to authorize Finra as the self-regulatory organization (SRO) for RIAs. That's a notion FSI has endorsed in the past.

But that legislation has hit a brick wall in the face of little support and strong opposition from the RIA community and state regulators.

“Finra doesn’t have a lot of fans on Capitol Hill,” said Brown, adding that FSI has stepped back from its full support for Finra as the SRO of RIAs. “I don’t see any support growing in Congress for pursuing that legislation.”

CARDS

A recent wrinkle on the regulatory front has been Finra’s concept proposal from late 2013 regarding its Comprehensive Automated Risk Data System (CARDS), a program that would allow Finra to automatically collect data from clearing firms on account trading activity, as well as security identification information that firms maintain as part of their books and records.

Finra says the program would help it better identify risks and bolster compliance and supervisory programs, among other things. Others see it as a case of Big Brother gathering too much information and infringing upon investors’ privacy, along with raising concerns about data security.

Brown said FSI is concerned that CARDS isn’t feasible for a number of reasons. “There’s no data standardization in this industry, so how do you gather all of that information uniformly in one database and accurately analyze and interpret it?” he asked.

“Another question is who pays the freight for it,” he added. “Our members already deal with tremendous regulatory, technology and data costs.”

Despite objections from FSI and others, Brown foresees this issue moving forward. “I think we’ll see another proposal on this in the next two to three months, and I think it’s possible by year-end we’ll see a rule to react to.”

Time To Modernize

Brown expressed his personal opinion that maybe it’s time to rethink the Securities Exchange Act of 1934 that regulates broker-dealers and the Investment Advisers Act of 1940 that regulates investment advisors.

“The opportunity we missed [during the debate over the Dodd-Frank Act] is we could’ve had Congress debate the modernization of the laws and rules governing our business because one of the biggest challenges the SEC faces is it’s regulating our industry with two laws written seven decades ago,” Brown said.

“I hope we can look at modernizing the laws to catch up with all of the innovation that’s happened in the marketplace to make it more like how you deliver advice every day to your clients,” he told advisors in the audience.

It’s not impossible that something of this magnitude could happen, Brown said, noting that a somewhat similar type effort occurred with the repeal of the Glass-Steagall Act in 1999 (though that has had mixed results).

That said, the political realities of modernizing the ’34 and ’40 Acts make it a very daunting—if not highly unlikely—endeavor.

“Probably the only thing that would get Congress to move on that is another crisis," Brown said. “But then the challenge would be trying to not end up with another Dodd-Frank that’s still being sorted out.”