In a surprising interview article just released today by Reuters reporter Suzanne Barlyn, FINRA Chairman and CEO Rick Ketchum goes on record stating that he sees "no sign [FINRA] can convince lawmakers in Washington to support a change in the way [investment] advisers are regulated anytime soon."
Ketchum attributes this primarily to the leadership changes in the House Financial Services Committee after the 2012 election, as Representative Jeb Hensarling has taken over for Representative Spencer Bachus (it was Bachus who had put forth the 2012 legislation that was widely viewed as paving the way for FINRA to regulate investment advisers). The matter was further complicated by the lack of clear support from the SEC.
The bottom line - Ketchum believes that continuing to push FINRA as overseer of investment advisers will make no progress in the foreseeable future, so it's backing off.
Of course, the reality is that investment advisers still have what is arguably very weak oversight, with the average firm being reviewed only once every 11 years. So the real question is whether, from here, the industry simply faces the status quo with no changes on oversight, or whether the studies pursuant to Section 914 of Dodd-Frank indicating that investment adviser exams will still lead to some kind of change. Perhaps what was previously viewed as the next leading alternative - a model where RIAs pay user fees to the SEC to provide the funding necessary for increased oversight (which was proposed last year by Representative Maxine Waters, which was estimated by the Financial Planning Coalition's study to be less expensive than FINRA oversight anyway - may again see the light of day in 2013. On the other hand, a follow-up story on the announcement later today by AdvisorOne suggested that perhaps FINRA will simply shift to trying to drive SRO legislation through the Senate instead, although so far the issue has been dead-on-arrival there.
Ultimately, I'm still a supporter of seeing better oversight of investment advisers, but hopefully with FINRA backing off there will be an opportunity to look at the issue intelligently and decide what the best course of action should be. As industry commentator Bob Veres noted in a guest post here last year, perhaps the reality is not that we need more examinations in the first place, but a better examination and oversight process. After all, most investment advisers do not actually have custody of client assets; their powers, at the most, are limited to discretionary trading of accounts, but not the custody of money that is generally the case in the most circumstances of fraud. So perhaps the best solution is to recognize that even within the investment adviser world, different firms have different business models, and present different risks to clients. Firms that custody assets - yes, it's very important to verify that assets are really there in the first place, and that there's no fraud or misappropriation of assets. Firms that have third party custodians, the issues are different, and frankly much of their oversight could be handled electronically and from a distance, without the cost of multiple auditors showing up at a firm to verify the books of a company that doesn't even have custody of the client assets in the first place!
In addition, the shift from FINRA perhaps gives a better chance to figure out how to coordinate the oversight of registered investment advisers between the SEC and the states, as the increase in the RIA minimum assets for SEC oversight to $100 million is estimated to have shifted about 2,300 mid-sized RIAs to state regulation. Yet in the long run, it's not clear whether a split of RIA oversight between the SEC and the states is really better than a single unified, consistent, and logical system to oversee all RIAs. Will we see new efforts between the SEC and NASAA to come up with a better unified plan in 2013?
For many, though, this latest news may simply allow for a collective sigh of relief from the RIA community that, at least for now, greater oversight may be on their terms, not FINRA's.
Source: "Exclusive: Watchdog backs off over financial adviser regulation" by Suzanne Barlyn of Reuters
Edit: The original version of this story incorrectly spelled Spencer Bachus' last name as Baucus.
Skip Schweiss says
Michael, great post.
FYI, you may be confusing Spencer Bachus (R-AL) with Max Baucus (D-MT). Check spelling.
Michael Kitces says
Oops, indeed I keep mixing the two up! That’s what I get for trying to write this on the fly!
Corrected spelling is there now! Thanks!
Jim McMahon says
I am glad you are keeping the discussion going with regards to matching oversight and relative risk. If a user fee is adopted, I pray it is scaled down appropriately for those of us who don’t even have discretion over client accounts.
I fear that we are such a small percentage of the whole that we will be lumped into a broader category and end up subsidizing the group.