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With SEC Hobbled, FINRA Poised to Offer Reinforcements

September 15, 2011

Photo by Dave Mathis. Some rights reserved.

A Dodd-Frank Act mandated study on investment adviser examination concluded that the SEC lacks the capacity to adequately examine investment advisers. The study recommended that the Commission be allowed to impose user fees on SEC-registered investment advisers to fund their examinations by SEC staff; that one or more Self-Regulatory Organizations (“SRO”) be authorized to examine, subject to SEC oversight, all SEC-registered investment advisers; or that the Financial Industry Regulatory Authority (“FINRA”) be authorized to examine dual investment adviser/broker-dealer registrants for compliance with the investment Advisers Act.

FINRA quickly let it be known that it stood willing and able to meet the need. And it appears to have friends in high places. Representative Spencer Bachus, Chairman of the House Financial Services Committee, has drafted a bill that would require investment advisers to register with a “national investment adviser association.” Indeed, because the draft bill is modeled on the law authorizing FINRA’s supervision of broker-dealers, FINRA’s appointment as a primary regulator of investment advisers almost seems inevitable.

On September 13th, the House capital markets subcommittee held hearings on “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight,” at which FINRA Chairman and CEO Richard Ketchum testified. Ketchum’s prepared remarks indicate FINRA’s close affiliation with Bachus’ proposed bill and Ketchum’s outline for a FINRA-sponsored investment adviser SRO closely tracks the draft bill.

Both the draft bill and Ketchum’s testimony are also quick to carve out exemptions aimed at appeasing institutional, hedge and private fund advisers. Fund Democracy founder and University of Mississippi School of Law associate professor Mercer Bullard noted these exemptions and the draft bill’s implications for financial planners in a commentary published by Morningstar.

The exemptions, however, risk undermining the bill, as noted by Barbara Roper, Director of Investor Protection, Consumer Federation of America, in her testimony before the House subcommittee. Exempting institutional advisers from SRO oversight would leave primary supervisory responsibility for the most complex institutions with the SEC and its strained resources.

The final word has surely not been heard.

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