•  
• Tweet
•  
•  
• 

FINRA Bids to Oversee Investment Advisers

Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority, testified before the US Senate Committee on Banking, Housing, and Urban Affairs on March 26th. As part of the testimony he talked about regulatory differences between broker-dealers and investment advisers and what needs to be done to make the rules more consistent. He says FINRA is “uniquely positioned” to build an oversight program for investment advisers. In addition, he raised the issue of the fiduciary responsibility of broker-dealers to their clients. Here are his comments on these points:

There are differences in the current rules and standards that apply to broker-dealers and investment advisers, reflective of some of the differences that exist in the services provided by each class of professionals. And while the two channels have converged over the years, there remain some differences that need to be taken into account when enhancing oversight and exams to make that oversight fit the activity and services in each.

Broker-dealers are subject to a very detailed set of rules established and enforced by FINRA that pertain to safety of customer cash and assets, advertising, sales practices, limitations on compensation, financial responsibility, and trading practices. FINRA ensures firms are following the rules with a comprehensive examination and enforcement regime.

Investment advisers are subject to provisions of the Investment Advisers Act of 1940 that pertain to registration, disclosure, record-keeping, custody and compensation. Importantly, investment advisers are also subject to a fiduciary standard with regard to their clients. In designing a more regular oversight and examination program for investment advisers, these rules and standards should be taken into account.

Simply put, FINRA believes that the kind of additional protections provided to investors through its model are essential. Does that mean FINRA should be given that role for investment advisers? That question ultimately must be answered by Congress and the SEC, but FINRA is uniquely positioned from a regulatory standpoint to build an oversight program for investment advisers quickly and efficiently. We have a strong track record in our examination and enforcement oversight, as well as in our other core programs. Certainly in the registration area, with regard to investment advisers and mortgage brokers, we have two success stories of adapting our infrastructure to meet needs in areas beyond the realm of broker-dealers.

We believe that regular and frequent exams are a vital component of effective oversight of financial professionals, and that the absence of FINRA-type oversight of the investment adviser industry leaves investors without that critical component of protection. In our view, it simply makes no sense to deprive investment adviser customers of the same level of oversight that broker-dealer customers receive. And quite simply, as we learned from the Madoff scandal, it would not make sense for two, separate independent regulatory bodies to oversee investment advisers and broker-dealers, especially when they exist in the same legal entity. Again, there would be no single regulator with a complete picture of the business.

One of the primary issues raised about investor protection differences between the broker-dealer and investment adviser channels is the difference between the fiduciary standard for investment advisers and the rule requirements, including suitability, for broker-dealers. As this the process moves forward, this is the kind of issue that should and will be on the table as we all look at how best to reform our regulatory system and strengthen investor protections. In keeping with our view there should be increased consistency in investor protections across financial services, we believe it makes sense to look at the protections provided in various channels and choose the best of each.

We stand ready to work with Congress and the SEC in exploring whether a properly designed fiduciary standard could be applied to broker-dealers selling activities, and if there are problems raised, make a strong effort to resolve those problems.