Due Diligence

SEC Or SRO? Debate Rages On With No Deadline In Sight

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debateSEC or SRO? The only thing that’s clear at this point in the debate over who will oversee investment advisers is that it is far from settled. No timeline or deadline for rulemaking on the matter has been set and there are plenty of arguments on all sides.

On Thursday, NAIFA, the insurance industry trade group said in a letter that it prefers that FINRA, the broker/dealer self-regulatory group, oversee and examine investment advisers. FINRA has been vocal about its interest in the job, and other broker/dealer groups like the Financial Services Institute also support FINRA as the best candidate. But earlier this week, the US Chamber of Commerce issued a report that called into question FINRA’s transparency and accountability. Meanwhile, investment advisers themselves, as represented by the Investment Adviser Association, prefer that the SEC do that job, with funding provided by user fees. In January, the SEC issued a report on the subject, as mandated under Dodd-Frank. That report offered several options, but leaned towards keeping the job at the SEC, with user-fee funding.

“It makes no sense to expand FINRA’s authority to investment advisers,” said David Tittsworth, executive director of the IAA. “The SEC’s report on investment adviser examinations cited by NAIFA clearly notes that other options such as user fees would provide OCIE with the resources to enhance its examination program.”

There is also a group that has floated the idea of creating a new SRO for the job. Meanwhile, the Consumer Federation of America recently backed off its opposition to having an SRO in the role. In testimony before the Senate Banking Committee, Barbara Roper, the CFA’s head of investor protection, said that while she would prefer that the SEC be properly funded so it could do the job, she does not now expect that will happen. "We have concluded that a properly structured SRO proposal would be a significant improvement over the status quo," said Roper.

So why does the insurance industry care who oversees investment advisers? Apparently, about 27 percent of NAIFA’s 40,000 members are dually registered, according to a survey conducted by LIMRA International. That came as a surprise. I have always thought that RIAs were slightly allergic to insurance products—certainly they have not traditionally been very fond of annuities—but perhaps those dually registered members are primarily broker/dealers with a little bit of RIA business on the side rather than the other way around. Indeed, NAIFA says that about 77 percent of its members’ compensation comes from commissions, nine percent from fees on assets under management and two percent from set fees for providing financial advice or planning. Only 1 percent of NAIFA members are SEC-registered investment advisers only—in other words, they don’t answer to FINRA at all.

“NAIFA supports reasonable examinations to ensure that financial professionals are complying with the law. Statistics have made it very clear that investment adviser examinations are not occurring with sufficient frequency. Because NAIFA members are already subject to comprehensive broker-dealer regulations, engaging FINRA to examine SEC-registered investment advisers will be the most efficient option for dually-registered NAIFA Members” said NAIFA President Terry K. Headley.

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