Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, March 25, 2011

FINRA CEO Speaks on Self-Regulation of Investment Advisers

Richard Ketchum, FINRA CEO, spoke on March 22 at the SIFMA Compliance and Legal Division's Annual Seminar and addressed the issue of FINRA's becoming an SRO for investment advisers, a possibility that most investment advisers oppose.  In his prepared remarks, Ketchum stated:

Specifically, whenever the discussion moves to whether FINRA should be the SRO for investment advisers, the talking points for IAs in opposition are simple: FINRA is not qualified because it only regulates broker-dealers and therefore doesn't understand the differences between the two models—meaning the end result would be that IAs would be forced to live under a broker-dealer regime. Frankly, that's simply wrong.

First, let me agree that there are important differences between broker-dealers and investment advisers. Any entity that would be empowered to oversee IAs would need to recognize that and regulate accordingly—and FINRA most certainly would.

If FINRA became the SRO for some or all investment advisers, we would have no intention to force the full suite of specific broker-dealer requirements on investment advisers. That would not be appropriate or in the public interest. The regulatory concerns regarding investment advisers primarily relate to the lack of examination resources, which places advisory clients at unacceptable risk, which is why we have said, and will continue to say, that SROs—especially for stand-alone IAs—should be viewed as a positive development for investors. No matter how rigorous the regulatory requirements, an adviser's obligations may provide only hollow protection to investors absent rigorous examination and enforcement. That's a service FINRA is well-positioned to provide.

FINRA would implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business. We would have authority to examine for, and enforce compliance with, the Investment Advisers Act and the SEC rules under that Act. We don't see the necessity for extensive SRO rulemaking and believe that the extent of that authority should be fully a matter for the SEC to determine. Of course, as it does with SROs now, the Commission would approve all rules. FINRA and its predecessor entities have operated under a similar regime for more than 70 years and would have no problem operating the same way in the IA space.

The other red herring related to FINRA serving as an IA SRO is that our governance structure would only reflect broker-dealer interests and not have IA representation. As we stated in our comment letter to the SEC—and as I have said many times—if FINRA becomes the SRO for investment advisers, our governance structure would appropriately reflect investment advisers. This would be carried out most effectively by setting up a separate affiliate that would have a board comprised of majority public representatives, but members of the investment adviser industry would be allocated the remaining seats.

The debate on how best to increase the oversight of investment advisers is one worth having, but the problem is too significant to let it wallow. As a proud "alumni" of the SEC, I would never suggest the Commission couldn't do the job if it had the resources. But the idle hope of that funding should not justify more delay. As Commissioner Walter said in her statement when the IA report was released, we must act now—investors deserve no less.

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