The Financial Services Institute on Monday sent a letter to the SEC voicing support for FINRA as the self-regulatory organization (SRO) for investment advisors.
FSI, an Atlanta-based advocacy group for independent broker-dealers and independent financial advisors, said such a move would bolster investor protection and enhance transparency for investors.
The letter was sent to the SEC as part of the public comment on Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which mandates the SEC to study the matter of enhanced examination and enforcement resources for investment advisors.
FSI has been advocating for a harmonization of regulatory oversight, as well as for a uniform fiduciary standard of care for both broker-dealers and SEC-registered investment advisors. In its letter, the group espoused that FINRA is well-suited to oversee all professionals regulated under the Investment Adviser Act of 1940.
"FINRA has experience in performing regulatory examinations of financial service providers and has experience operating an SRO whose structure is designed to ensure its governing body, committees, and staff act in the public's best interests," Dale Brown, FSI's president and CEO, said in a statement.
Mari Buechner, 2010 FSI chair and president/CEO of Coordinated Capital Securities Inc., said putting a uniform regulatory structure in place for investment advisors, broker-dealers and their affiliated advisors would close the gap in regulatory exams and enforcement resources between the two groups.
FINRA oversees about 4,620 brokerage firms and 636,340 registered reps. According to FINRA, 55% of broker-dealers are examined each year by FINRA and the SEC.
The SEC currently oversees more than 11,000 RIAs, but it expects to examine only 9% of them this year.
In its letter to the SEC, FSI said it believes that the existing regulatory system for RIAs--both at the SEC and state level--is "inferior" to the current system of broker-dealer supervision because neither of those entities have enough resources to do an adequate job.
In addition, FSI said the examination programs of state securities regulators responsible for examining RIAs with less than $25 million in assets--the threshold jumps to $100 million next year--can vary widely.
"An SRO for investment advisors is an essential part of any serious effort to enhance investor protection," Buechner said.
FSI wrote that FINRA as the SRO--under SEC's supervision--would focus on routine exams and supervision of investment advisors, while simultaneously enabling the SEC to focus on capital market matters, rule making for all regulated entities and other regulatory duties.
Other industry groups, such as the Investment Adviser Association and the Financial Planning Coalition, vehemently oppose FINRA becoming the SRO for investment advisors. Instead, they want Congress to boost the SEC's resources to ensure it has enough manpower to effectively examine RIAs.
"The SEC has the expertise and the history with the Investment Advisers Act, and we believe this [RIA oversight] is a critical government role that shouldn't be outsourced," says Neil Simon, vice president of government relations at the Investment Adviser Association. "We don't want to see it contracted to an industry organization [FINRA] that historically has been hostile to the more principles-based regulatory scheme for investment advisors that revolves around the fiduciary standard."
In a letter sent to the SEC in November regarding Section 914, FINRA CEO Richard Ketchum extolled the virtues of the SRO model, mentioning private funding as one its advantages. He also extolled the virtues of FINRA's role as an SRO for broker-dealers, and seemed to make a pitch that the regulator is up to the task if the SEC wanted to go the SRO route.
"We recommend that the Commission seek authority to establish one or more self-regulatory organizations for investment advisors," he wrote. Ketchum also stated that FINRA doesn't believe it's in the public interest to impose a broker-dealer-like regulatory regime on RIAs.