Due Diligence

No SRO For Investment Advisers Under Reform Bill...Yet

One topic that has been heavily debated in the investment advisory industry in recent months is whether investment advisers need an self regulatory organization (SRO). FINRA, the SRO for broker/dealers and their reps, has eagerly offered to take up the task, but most RIAs and investment advisers worry that FINRA would be biased in favor of the broker/dealer firms it already regulates and would not regulate them fairly.

Under the Wall Street reform bill headed for President Obama's desk this week, the SEC is required to study whether an SRO is needed for investment advisers, but it does not have the authority to delegate any responsibility for investment adviser regulation to FINRA or another SRO. For that, the SEC would need further Congressional approval.

Even if an SEC study indicates an SRO is needed, and Congress approves the creation of one, the SEC will retain ultimate authority over regulation of investment adviser firms, just as it now has ultimate authority over FINRA, says Kristina Fausti, director of legal and regulatory affairs for Fi360. FINRA cannot enforce federal securities laws, she notes. It can only enforce it's own supplemental rules.

"The way that FINRA is set up, it can set its own rules, and it can seek compliance and enforcement with those rules. But violation of federal laws themselves is referred to SEC, because the SEC is the only one who can enforce the securities laws themselves," says Fausti. "For investment advisers it would probably be a similar system."

On the other hand, if the SEC does decide to extend the fiduciary standard to broker/dealers, FINRA could create its own rules to supplement that, Fausti says.

The Commissioners seem to be split, so far, on the topic of SROs. Commissioners Elisse B. Walter and Kathleen L. Casey have said they are in favor of an SRO for investment advisers to ease the SEC's oversight burden. But Fausti speculates that Chairman Mary Schapiro might prefer that the SEC maintain control, as long as it gets the resources it needs to effectively regulate investment advisers on its own.

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