Two numbers and a word are crucial to understanding the dangerous landscape for RIAs in Washington, D.C.

• 30,000
• 650,000
• Harmonize

The first is the number of principals at RIAs. The second is the number of registered securities representatives. And the third is the goal of the Obama administration: harmonize the regulations of the two groups of professionals.

Anything can happen in Washington, which means that the administration could fail to pass the particular legislation dealing with RIAs and broker-dealers. But the smart bets are on change in the wake of the financial crisis and in the presence of a Democrat-controlled executive and legislative branch that are both pushing the SEC to be better.

For the past few weeks, I’ve been asking experts what they believe the key battles will be for RIAs over the next year or so. The danger is apparent in the numbers: legislators and regulators will be tempted to design a new regime based on the larger group.

So how can independent RIAs emerge as businesses that can still be differentiated in the eyes of clients, without an overly burdensome regulatory regime, that can compete with much larger and more numerous broker-dealers? In short, what needs to happen so that RIAs are not subsumed to a Securities Industry and Financial Markets Association world?

1.) Barney Frank and his House Financial Services Committee need to write legislation that maintains the strength of the fiduciary standard – ideally, keeping it the same as the one RIAs operate under now

RIA advocates hope that legislation will merely expand the current fiduciary standard, which is defined by case law and the Investment Advisers Act of 1940, to broker-dealers. But many advocates believe that is unlikely. What is more likely is that the legislation will include language that adds to the ways the fiduciary standard can be defined. If that’s so, then everything will hinge on the exact language.

RIA advocates want the fiduciary standard to come into play depending on the kind of service a professional is providing; SIFMA is arguing that the fiduciary standard should come into play depending on what kind of client is being served.

A draft of the legislation gave the SEC explicit authority to make sweeping rules affecting both RIAs and broker-dealers. David Tittsworth executive director of the Investment Adviser Association, believes broadening the SEC’s power could be dangerous, and hopes any legislation that passes leaves out that provision.

We may know the outcome of this battle sooner rather than later. Because the bigger pieces of financial reform are proving much more difficult to get going than the administration had hoped, “Barney Frank is trying to move some pieces that he thinks he can move,” says Tittsworth, who says the Investor Protection Act, the legislation in question, could come up for a vote in committee as soon as next week.

Barney Frank: Could launch a preemptive
strike on behalf of fiduciaries as
early as next week

2.) RIAs need to land with the right regulator

RIA advocates hope that RIAs stay under the purview of the SEC and are open to the idea of shifting regulation of smaller RIAs to the states. The North American Securities Administrators Association has proposed increasing the number of RIAs under state regulation by shifting the cap for those that are from $25 million in assets under management to $100 million.

FINRA, which currently regulates broker-dealers, has been angling to take over regulation of RIAs. The Financial Planning Coalition, which includes three prominent trade associations, has proposed establishing another SRO to oversee RIAs.

At the moment, Washington seems to be favoring the SEC status quo: The latest draft of legislation did not include shifting RIAs either to FINRA or to a new SRO.
“What I’ve seen lately is the SEC at least inching toward the SEC remaining the regulator,” says Brian Stimpfl, managing director, advisor advocacy and industry affairs for TD Ameritrade, who says he’s also been heartened that legislators are taking their time to deliberate issues. “I was worried in the winter, as frauds and scandals broke, that there would be a rush to judgment.”

3.) Mary Schapiro needs to continue her slow embrace of the fiduciary standard

Schapiro is automatically viewed by suspicion by many because of her previous job as chief executive of FINRA. But observers say her speeches have slowly moved toward an RIA-like embrace of the fiduciary standard.

In one recent speech to the Financial Roundtable, she said this: “The standard of conduct that applies to the act of giving professional advice to investors should not be a watered-down, “fair and reasonable” commercial standard. In order to be consistent with the reasonable expectations of investors, the standard that applies to this activity, which is so integral to investors’ financial security, must be the type of fiduciary standard that applies to a relationship of trust and confidence, as contemplated by the administration’s proposal.”

Mary Schapiro: “The standard of conduct
that applies to the act of
giving professional advice to investors should
not be a watered-down, “fair and
reasonable” commercial standard.

Knut Rostad, chair of the Committee for the Fiduciary Standard, believes Schapiro’s position is the single most important factor for RIA’s to avoid falling under a system that’s designed for broker-dealers.

She has the ear of legislators and the administration. She will also oversee new regulation, and could decide, even in the absence of direct legislation, to put RIAs under the oversight of FINRA or to shift oversight of a greater number of RIAs to state regulators.

4.) RIAs need to find friends in the House of Representatives

Given this year’s pressing legislative agenda – think health care and the Consumer Finance Protection Agency — there is no telling when legislation voted out of the House Financial Services Committee could be scheduled for a vote by the full House. There’s also no telling whether RIA interests will be served by an up or down vote on legislation by the time it comes up for a vote.

“Can the cure be worse than the disease? Absolutely,” says Tittsworth.

But one thing is for sure – RIAs are a bit player in this Washington drama. Provisions that reshape world of RIAs are likely to be attached to a larger bill, and the RIA lobbying presence and dollar is much smaller that other finance lobbyists.

5.) Sens. Christopher Dodd and Charles Schumer need to decide not to ally themselves too closely to SIFMA

Sen. Dodd leads the Senate Banking, Housing and Urban Affairs Committee, where legislation that corresponds to the House Financial Services Committee legislation is more likely to be drafted. Sen. Schumer is a influential member of the committee. Both men have Wall Street firms among their constituents, and both men count the securities and investment business as their biggest industry donor.

In 2008 alone, according to the Center for Responsive Politics, the securities and investment industry gave more than $3 million to Schumer’s election committee – and you can bet most of that came from big securities firms and banks. But both men are up for re-election in 2010 – and will feel the pull of party and the need to fulfill the administration’s goals.

6.) RIAs need to find friends in the Senate

See #4 above. The legislative calendar might be less crowded in 2010, when legislation pertaining to RIAs reaches the Senate floor, if it does, but all the same issues apply.

7.) Any new SEC regulations need to be sympathetic to RIAs

With the Obama administration pushing hard for change early in his presidency, the time is now for new SEC regulations, whether directly authorized by legislation or not. But will harmonizing broker-dealer and RIA regulation turn out to mean making it easy for the broker-dealers? The size of the broker-dealer world and Ms. Schapiro’s history has RIA advocates worried.

The fact that RIA interests often lie with investors’ interests may work in RIAs’ favor. The SEC this year created the Investor Advisory Committee, which does include RIA representation on its board. It will offer advice to the SEC as it promulgates new regulations.

“I’m very encouraged by the creation of the committee,” says Don Trone, CEO of Strategic Ethos. “That doesn’t mean it will carry the day.”

8.) RIAs will need to be the best fiduciaries out there

If, as now seems likely, broker-dealers adopt the fiduciary standard for at least some of their clients or services and the SEC adopts new rules that run a middle road between the business models of RIAs and broker-dealers, the fight will move to the marketplace.

Don Trone: "The real battle will
be waged after the regulations.”

“The black letter law and the change of regulations will not be a source of celebration or victory,” says Trone. “The real battle will be waged after the regulations.”
Trone argues that, having lost a significant marketing advantage in being the only professionals operating under a fiduciary standard, RIAs will need to become the best at the practice of fiduciary, adopting the most efficient and investor-friendly fiduciary process.

“Let’s get out ahead of the wirehouses and define the process and best practices to meet the letter of the law,” he suggests.

RIAbiz is gathering comments from RIAs about who should regulate RIAs to send to Rep. Paul Kanjorsky, a member of the House Financial Services Committee who asked for feedback. Add a comment or send an e-mail directly to Elizabeth@riabiz.com with your thoughts.