New FSI chairman isn't sugarcoating FINRA's shortcomings but blasts the SEC on porn and Blackberries in this letter

Brooke’s note: Here is one interesting backhanded recommendation of FINRA. It starts out with a fairly stinging indictment of the proposed SRO. Instead of ever getting around to saying that FINRA is a lovely organization once you get to know it better, the new FSI chairman says his organization’s big presence in FINRA will keep the latter group from getting too far out of control with RIAs. He also has some paragraphs with every embarrassing thing in the SEC’s recent history — from pornography to BlackBerry resistance. Joe Russo also says that the FSI would hardly be a fiduciary — or even be acting under a suitability standard — were it to pursue its members’ interests in repealing Dodd-Frank. You’ll have to read the whole letter to get the logic here. One thing that makes covering the advisory business interesting is the degree to which advisors speak their mind. Joe Russo is true to that legacy.

A message from FSI chairman Joe Russo

As the first-ever financial advisor to chair the Financial Services Institute, I know many of our financial advisor members have questions on why FSI is backing FINRA as the SRO for RIAs. It’s time we have a frank, candid discussion on our thinking. Please keep reading to find out why we’re supporting FINRA as the SRO for RIAs.

As we travel around the country speaking to financial advisors one thing has become very clear — there’s a lot of noise coming out of Washington, D.C. (We know we are not telling you anything new), and there’s a real need for us to have a candid conversation about our most pressing issues with our members so that you not only know what we are working on but why we are taking the positions we are taking on these issues.

This first one is the most timely — our push for a self-regulatory organization for RIAs to help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.

Two quick things: One, FSI endorsed FINRA as the SRO for RIAs over a year ago and very publicly, so this isn’t new for us; two, we’ve twice polled our financial advisor members on this issue, and roughly 75% agreed with our position. That being said, even those who see the logic behind it aren’t thrilled with giving FINRA greater reach and responsibility.

So let us say this: we are by no means oblivious to the many challenges FINRA creates as our industry’s principal regulator, nor are we saying there won’t be problems with FINRA in this expanded role. What we do know is that there is a political reality that FSI must deal with on behalf of our members — and that reality is called the Dodd-Frank Act. See: Advisory factions steel for end game as SEC’s verdict on FINRA SRO comes down.

Mind the gap

Dodd-Frank recognized the regulatory gap that currently exists — only 8% of RIAs were examined by the SEC last year. That’s an average of once every 13 years; and nearly 40% of RIAs have never been examined.

To protect consumers and level the playing field, this regulatory gap must be eliminated. Dodd-Frank mandated a study which ultimately directed the SEC to develop options to close the gap. The SEC responded with three: 1) Give the SEC more money to hire more examiners through user fees on RIAs (political fantasy); 2) have FINRA serve as the SRO for dual registrants (encouraging advisors to go RIA only and continue to skirt examination); or 3) draft legislation empowering the SEC to approve an SRO for advisers (the only political reality). See: FINRA comes up with cost projections for its SRO and the CFP Board blasts them.

Knowing that left to its own devices Washington often gets it wrong, we at FSI knew we had to take a position that would best serve investors and our members, and see it through to the end — no sitting safely on the sidelines. After careful consideration and deliberation, our board took the bold position that the only viable solution, politically and practically, is to support FINRA as the SRO for RIAs. There is no escaping the fact that this is a classic “the devil you know versus the devil you don’t” situation. See: Why advisors see FINRA as the devil.

What the hell?

Now, because of our understanding of Washington, we know a lot of what we’ve heard stems from a misunderstanding of the political reality by some of our members. We’ve heard some ask us, “Why don’t you spend your time and energy advocating for the full repeal of Dodd-Frank and not FINRA as an SRO?”

While you won’t find any raving fans of Dodd-Frank at FSI, we also intimately know the political reality, and that is that the law is here to stay for the foreseeable future. In fact, I’d go as far to say that, even if Republicans win not only a majority in the Senate, but a supermajority (60 votes), the bill still wouldn’t be repealed. You’d most likely need about 65 Republicans in the Senate to make up for those that you’d lose on the vote to get it to the president’s desk.

So while we know it would make some of our members feel good to see us advocate for the repeal of Dodd-Frank, it wouldn’t do any good, and we wouldn’t be spending the resources and influence you are giving us wisely. To put it in industry terms, we wouldn’t be acting as good fiduciaries — in fact, our approach wouldn’t even be suitable. It would just be irresponsible. It would marginalize not only FSI but the industry we represent and seriously impede our ability to impact any issues going forward.

Now that we’ve established Dodd-Frank isn’t going away any time soon, and Dodd-Frank provides an opportunity for this regulatory gap to be closed, is it going to be the SEC, FINRA or a brand new bureaucracy no one knows? For us, the answer wasn’t pleasant, but it was simple: the devil we know.

Porn free

First, everyone in D.C. knows that this Congress is never, ever, going to give the SEC more money.

Second, the SEC is fraught with problems. Lest we forget, numerous staff members were caught surfing porn rather than doing jobs, revolting over BlackBerrys so they didn’t have to work outside the office, renting office space they don’t need, leaving a beneficiary of Bernie Madoff in charge of liquidation, investigating their watchdog after he issued unflattering reports, and on and on and on. See: Compliance GPS: It may be a mistake to project too successful an image, especially in a post-Bernie Madoff world.

With all of the SEC’s very public problems, and with the SEC’s own chairman, Mary Schapiro, finally endorsing the SRO option, anyone who claims the SEC is a viable alternative isn’t being intellectually honest in terms of political reality. In addition, not all, but some of those pushing the SEC knowing this political reality are in fact doing so simply to keep the status quo.

The option of a brand new SRO or multiple SROs is also troubling. For FSI to back a strategy that could set up one or more new regulators that we don’t know and don’t have influence with wouldn’t be taking full advantage of the relationships we’ve worked years on strengthening.

You then add to the mix the fact that the Consumer Federation of America dropped its 20-year opposition to an SRO and you can see that the tide was clearly turning.

Need to collaborate

FINRA, as we said from the beginning, isn’t perfect. They are actually nowhere near perfect. But, they do have the resources to do the job, and they would be much more affordable for our members from a small-business cost standpoint than the SEC user fee proposal.

FSI has a good working relationship with FINRA. There is an FSI member on the FINRA Board, there are 20 FSI members on FINRA district committees and the FSI senior staff has a close working relationship with the FINRA senior staff. Certainly, we don’t always get what we work for with FINRA — we wish we could say we had a perfect record, but we don’t. But we do have many wins in terms of changing proposed rules and regulations coming from FINRA to our members’ benefit that we can hang our hat on.

If FINRA becomes the SRO for RIAs, FSI pledges to you that we will stop at nothing to try and ensure the most responsible and efficient, and least intrusive, regulator for RIAs that’s possible while protecting investors. And if FINRA’s not doing their job, we’re the first you’ll hear it from.

We’re here to create a healthier, more business-friendly regulatory environment for you, our members. We’re here to make your life easier and your business more prosperous, and to preserve your clients’ access to your much-needed services — period.

And we truly believe, with FINRA in place regulating RIAs, we’ll finally help level the playing field for you, eliminate an unfair competitive advantage and better protect consumers.

Sincerely,

Joseph R. (Joe) Russo
2012 chair, FSI Board of Directors