RIAs Still Fear FINRA Oversight

RIAs Still Fear FINRA Oversight

Despite FINRA backing off a bid to become the regulator for registered investment advisors, some still fear the authority's scrutiny if the Securities and Exchange Commission moves forward with third-party examinations.

“I live in fear, quite honestly, of FINRA assuming the responsibility of examining investment advisors,” says Stephanie Monaco, a partner of the corporate & securities practice at Mayer Brown, speaking at the Investment Advisor Association's compliance conference Thursday in Washington, D.C.

The SEC has been criticized by some in Congress over how frequently the commission examines RIAs, though there is a lack of consensus on funding the commission to support a more rigorous schedule. That's prompted some commissioners to suggest the government hire third-party examiners, possibly funded by a fee on the firms themselves, though that too has not gained traction among legislators.

“My fear is [the third-party examiner notion] will gain some traction because Congress is unlikely to give SEC the money it needs to properly staff up ... and despite our advocacy of the user-fee notion, it’s just not gaining bi-partisan support,” Neil Simon, the Investment Advisor Association’s vice president for government relations, said at the conference. “It’s very possible at some point Mary Jo White and the other commissioners will throw up their hands and say ‘we have to move on this third-party exam notion.’”

Simon added that RIAs should not read too much into FINRA head Richard Ketchum’s previous statements that the authority was not pushing for the oversight. “I don’t think FINRA has surrendered its long-held goal of gaining authority over us,” Simon says. “FINRA is hopeful that this [third-party examiner] notion that Commission Gallagher has put out there will come to fruition, and while it might not allow FINRA to come in through the front door, it will open the side door.” 

Appointing FINRA as the self-regulatory organization for investment advisors would not take any legislation, Simon warned, adding SEC could make the move under its existing authority.

Monaco says that the FINRA staff are very specialized, very skilled individuals, but their training is in handling broker/dealers. But there’s a different approach needed when thinking and working with investment advisors. “I’m very concerned that if you try to re-wire the broker/dealer examination staff at FINRA, then all of a sudden investment advisor activities will be measured by broker/dealer standards,” Monaco says, adding it could mean more burdensom regulations on RIAs.

In recent years the SEC has annually examined around one out of ten investment advisors. Recently, Chair White said the commission upped that rate by 15 percent in 2014 by completing 1,850 exams.

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