Tom Bradley makes the case for regulatory efficiency -- and maybe, FINRA, especially for the dually registered

It makes sense for FINRA to examine dually registered investment advisors, said Tom Bradley, president of TD Ameritrade, in a keynote address at a panel discussion on the fiduciary standard.

“If you have dually registered firms, it makes perfect sense for the SEC to farm out the examinations of dually registered firms to FINRA,” he said, noting that it’s more efficient for a small company if it only has to deal with one set of examiners, instead of two. There are about 600 dually registered advisors.

Bradley also indicated an openness to the idea of FINRA regulation of all advisors, saying that while he knew that many advisors opposed FINRA as a regulator, their opposition should be studied. He spoke at a panel discussion sponsored by the Committee for the Fiduciary Standard, held at New York University’s Law School yesterday.

“Let’s not exclude any option out of emotion,” he said in a call after the panel. “It’s one of the options that we need to look at.”

The company issued a statement after the panel, saying that it supported keeping the SEC as the primary regulator for advisors.

But Bradley said that all the facts were not yet on the table and that it is too early to make a definitive call. Among the options that the SEC staff has looked at are user fees that would flow to the SEC; or shifting oversight to FINRA, which is already funded by user fees. The idea is to increase the number of exams of investment advisors; currently, only about 9% are examined every year.

“Ask an advisor what they’d think if the SEC could do it for $100,000 and the FINRA could do it for $1,000,” he said.

Bradley’s remarks highlighted the complexities that are emerging as the regulatory overhaul of investment advisors and broker dealers – an overhaul that is likely to go on for years — begins. See: The RIABiz list of winners and losers in the wake of the SEC’s fiduciary study.

Varying stands among custodians

Though TD has a somewhat nuanced position, Schwab Advisor Services the question of advisor oversight as more black-and-white.

“We think it’s absolutely wrong if these advisors are under an SRO— for instance FINRA,” James McCool, Schwab’s executive vice president, Institutional Services, told a roomful of analysts on Feb. 3 in San Francisco. This reiterates a position Schwab took earlier. See: Schwab takes high-profile stand opposing self-regulatory organization for advisors.

Fidelity has not taken a prominent stand either way, though its executives have spoken publicly about the issue. See: Testy words pass between advisors and regulatory panelists at MarketCounsel conference.

“Fidelity has been deeply engaged in a dialogue with the industry and policymakers to help determine the best way forward, and to help ensure that advisors and brokers are regulated effectively. The decision is ultimately up to Congress, and we at Fidelity look forward to working with them to develop concrete proposals that will enhance advisor oversight to the benefit of both investors and advisors,” said spokesman Steve Austin.

There is general agreement that if FINRA were to take on investment advisor examinations, its staff would need greater training in advisors’ business models. See: Rick Ketchum reveals plan for advisor oversight at FSI conference.

“They need to understand that portfolio management is a different discipline than product sales” said one audience questioner at the panel. Thomas M. Selman, executive vice president, Regulatory Policy for FINRA, agreed. As one of the panelists, he reinforced the idea that FINRA would need to train staff several times.

Even as FINRA executives have continued to outline a regulatory regime that they say would respect the RIA business model, some advisors still have a visceral reaction to the idea of being examined by FINRA.

“If FINRA wants to regulate dually registered advisors, I’m okay with that. I just don’t want to have to be regulated by FINRA as an Independent SEC Registered Investment Advisor,” said Jessica Maldonado, vice president of Overland Park, Kansas-based Searcy Financial Services Inc. “We used to be dually registered and it was a nightmare because a good portion of the rules and requirements made no sense in the capacity in which we were serving as a discretionary investment manager and financial planning firm.”

“It was a lot of additional work that had nothing to do with how we functionally operated our business. FINRA registered people have been rules-based, which caters to the lowest common denominator of legality (i.e., As long as I follow the rules, it’s okay.), whereas SEC registered advisors are held to a higher standard, a fiduciary standard (i.e., What’s in the clients’ very best interest?). Because we always operate as a fiduciary, many of the rules made no sense for our practice.”

Craig Watanabe, principal with Penniall & Associates, Inc., an RIA in Pasadena, Calif., that custodies with TD Ameritrade, said hybrids may well be open to the idea.

“I feel qualified to answer this question because two years ago I was the COO/CCO of a midsize BD/RIA and I have been examined by both FINRA and the SEC many times. Both SIFMA and FSI support FINRA becoming the DEA for RIAs. The TDA audience would be vehemently opposed but I suspect one would find the opposite response at the FINRA annual conference. If I were still CCO I wouldn’t mind having FINRA examine both the BD and RIA at the same time.”

It is becoming clear that the issues of expanding the fiduciary standard to broker-dealers and improving advisor oversight are deeply entwined. The panel discussion was billed as being about the standard – and there was plenty of legal discussion about what what levels of disclosure were required, and when a clients’ “best interests” were served. But the most heated discussion was about the SRO for investment advisors.

Selman said that he believed that if Congress does pass legislation authorizing an SRO for advisors (experts believe that the change would require Congressional action, which is a high hurdle), Congress would authorize the SEC to make such a change.

The SEC, in turn, could issue what amounts to a request for proposal for SROs.

“We would apply, and we are the biggest SRO and we think we have a good shot,” he said.

There has been speculation that one or more advisory groups could put forward their own proposal. David Tittsworth, executive director of the Investment Adviser Association, said the IAA has been asked to consider the idea of serving as an SRO by its members and others.

“Any serious effort would require more resources than we have,” he said. “Consider, if you are a regulator, you have FINRA. It runs the registration system for RIAs that could be used to collect fees. It has a $1 billion in the bank, billion with a b. It has 70 years of regulation and oversight authority.”
“How do you compete with that?”

See: Is FINRA oversight a fait accompli? It’s starting to feel that way..

Marilyn Mohrman-Gillis, managing director of public policy for the CFP Board of Standards, said, “We continue to maintain that oversight should remain with the SEC and the SEC should be provided scalable resources to do the job.

“However, should a legislative proposal authorizing the SEC to designate one or more SROs begin to emerge, we expect to work closely with the key legislators and with the SEC to ensure that any SRO for investment advisers be structured and governed in a manner that ensures that it will provide appropriate and effective oversight for fiduciary advisers.”

Elizabeth’s note: I want to direct readers’ attention to the lively debate on the winners and losers in the SEC’s regulatory overhaul. See: The RIABiz list of winners and losers in the wake of the SEC’s fiduciary study. Check out the comments at the bottom of the story from Brian Hamburger, Barb Roper, Neil Simon and others who have been working on these issues for years.