A couple of law students from Oxford, Miss., backed by vocal investor advocate Mercer Bullard, have ambitious plans to create an SRO (self-regulatory organization) for investment advisers. Their group would rival FINRA, the SRO for broker/dealers, and currently the leading contender for the job, they said.
Of course, whether regulation of investment advisers remains with the SEC or gets passed on to an SRO is something that still needs to be decided by Congress.
Tyler Roberts and Timothy Collins, students at the University of Mississippi Law School, announced their intention to create the SRO during a conference call Wednesday. They are sponsored by the Business Law Society, which helps students design projects with real-world application, and the SRO is dubbed SROIIA (“sir-oy-uh”).
SROIIA would be funded by user fees and would examine 100 percent of its RIA members every year with a lot of "small-touch, tailored interactions," the students said. It would also focus on pure RIAs without any broker/dealer affiliation; these firms account for about 76 percent of all RIA firms, according to a 2010 report from the Investment Adviser Association and NRS called Evolution/Revolution, which examined forms ADV filed with the SEC. Last year, the SEC only examined 9 percent of the 11,000 RIAs in its jurisdiction.
Most investment advisers are strongly opposed to giving FINRA the job because they worry the b/d group will have conflicts of interest and will water down the fiduciary standard. One goal of SROIIA, said Bullard and the students, would be to maintain the strictest fiduciary standard for the investment advisers it regulates.
But Roberts and Collins were otherwise short on details, such as what it would cost to run such a group, how much it would charge members and how much staff it would need to do the job. "Our resources are the biggest hurdle right now," said Roberts. There is also the problem of expertise.
The two students plan to launch a survey of at least 500 investment advisers nationwide in a couple of weeks that will help them answer some of these questions, however, and they are working to bring on strategic partners to help them with examination and enforcement expertise, though they couldn’t name any partners yet.
On the conference call, Bullard harangued other adviser organizations for not launching an SRO effort themselves. “I’m wondering what the CFP Board, the IAA and the FPA are thinking,” he said. “They talk a lot about not wanting to have FINRA be the SRO but they’re behind the curve.”
Compliance consulting group Fi360 confirmed that it has had very preliminary conversations with Mercer Bullard about partnering with the group and is considering it. The Financial Planning Association, the Investment Advisors Association and the Committee for the Fiduciary Standard said they have not been approached.
Fi360 is cautiously optimistic about the group’s chances for success. “They stressed the need to have strategic partners,” said Fi360 president and CEO Blaine Aikin. “And I think that could make this a feasible endeavor,” he said.
Although Bullard, who is the president and founder of pro-investor group Fund Democracy, has no official role in SROIIA, Aikin said that Bullard’s participation and backing should provide a serious boost to the effort. But he will have to work quickly, he added.
“I think about things like the Committee for the Fiduciary Standard—that was a dozen people who put their heads together, and that went much further than anyone expected. You can look at Fund Democracy and the same thing could be said there. Mercer Bullard is a very serious player in this area, so I wouldn’t discount his capabilities to pull it off. But these things are going to have to play out quickly so people sign on to the concept.”
Knut Rostad of the Committee for the Fiduciary Standard said the group applauds the effort, but would have to hear more before jumping on board. “It could be viable. We’d have to wait and see how it develops to ascertain what, if any role we might play,” he said. But he added, “At some point, [Facebook founder Mark] Zuckerberg was short on details, too.”
Yeas and Naysayers
At the heart of the controversy over who will regulate investment advisers is a business rivalry between broker/dealers and investment advisers, much of which revolves around the fiduciary standard. Investment advisers adhere to the fiduciary standard, a stricter standard of conduct than the suitability standard that brokers must adhere to. But investment advisers are also subject to fewer rules and are examined far less frequently than b/ds are.
Dodd-Frank aims to remedy some of these discrepancies. Among other things it would allow the SEC to to harmonize regulation of the two sides of the profession and to extend the fiduciary standard to brokers when they provide personalized investment advice to retail customers.
At the end of January, the SEC offered three recommendations to Congress for improving oversight of investment advisers as required under Dodd-Frank—authorize the SEC to charge user-fees so that it has the funding to do the job itself, hand oversight of b/d affiliated investment advisers to FINRA, or allow for the creation of one or more other SROs.
The SROIIA announcement drew predictably mixed reactions from industry groups on either side of the divide. FINRA said in a statement that it supports the students' effort, while FSI, a trade group for small broker/dealers, said it feels there is a danger in having too many regulators on one beat. Investment adviser, consumer and fiduciary advocacy groups, such as the IAA, the FPA and the Committee for the Fiduciary Standard, said they do not support an SRO and would prefer that Congress authorize the SEC to charge user fees so that it will have sufficient funding to do the job itself. But some of them expressed optimism about SROIIA's chances for success, if an SRO is the only option.
“We welcome the recognition by Professor Bullard that SROs can and should play a critical role in the oversight of investment advisers,” FINRA said in an email statement. “FINRA has always believed that authorization of one or more qualified SROs to augment the SEC’s oversight of investment advisers would provide critical investor protection to customers of advisers.”
FSI, meanwhile, said it thinks that having one SRO, FINRA, is better than having two because it could cause gaps in regulation. “The reason we endorse FINRA is we think they have experience in performing regulatory examinations of financial services providers, and have experience of operating an SRO,” said David Bellaire, general counsel at the FSI. “One of the lessons taken from the great recession is that when there are a lot of regulatory boundaries and divides and overlapping jurisdictions, those create gaps where unscrupulous people can hide and where regulatory responsibility for oversight is unclear.”
The Investment Advisers Association has long supported the SEC, funded by user fees, as the best alternative, and that has not changed. “The SEC has decades of experience with the advisory profession, it’s accountable to Congress and the public and we still believe that that is the best first preference,” said David Tittsworth, executive director of the IAA.
He’s also pessimistic about SROIIA’s chances for competing with FINRA. “I just don’t know whether it’s realistic to think that Mercer and his law students will be able to come up with a viable alternative to FINRA or anybody else for that matter,” he said. “FINRA has got more than a leg up. They’ve got a national infrastructure, technology, experience as an SRO for 7 decades and $1 billion in the bank.”
The FPA was more optimistic about the group’s chances. “FPA doesn’t think that an SRO for advisers is needed,” wrote Dan Barry Managing Director, Government Relations & Public Policy for the Financial Planning Association in an email after the call. “The SEC and states have decades of experience overseeing advisers, and their responsibilities shouldn’t be outsourced. But, SROIIA is an interesting idea and we’re looking forward to learning more about how it would work if advisers are ever required to submit to SRO oversight.”
Compliance consulting group Fi360 also prefers that the SEC get funding to do the job, says president and CEO Blaine Aikin, but he is not optimistic that will happen in the current political climate. He thinks that it’s more likely that Congress will opt to have the SEC designate FINRA as the SRO for the investment adviser industry, and that FINRA would enforce a less strict version of the fiduciary standard to which investment advisers currently adhere.