Views on improving the integrity of global capital markets
10 June 2015

Investment Adviser Oversight: Is FINRA Back in the Game or Is Someone Else on First?

Posted In: US SEC

The question of who will oversee registered investment advisers (RIAs) has once again become a topic of interest following the recent Financial Industry Regulatory Authority (FINRA) annual conference. In comments he gave at that conference, US Rep. French Hill (R-AK), a member of the House Financial Services Committee, floated the idea of introducing legislation that would give FINRA jurisdiction over the examinations of advisers.

What does FINRA think?

FINRA Chief Legal Officer Robert Colby said “We’re interested, but we’re not pushing it.”

Those of you who have followed this issue over the years know that the path has been contentious, meandering, and still lacks resolution.

CFA Institute first polled its members (see related comment letter) back in November 2010 as to who should be responsible for overseeing investment advisers; 57% of respondents favored the Securities and Exchange Commission (SEC). An SEC staff report noting that the SEC lacks sufficient resources to examine advisers on a timely basis, suggested three approaches to beefing up the examination process: establish a self-regulatory organization (SRO) for advisers; impose user fees; or have FINRA conduct exams of those dually registered as broker-dealers and investment advisers.

Since then, there has been a lot of action, but no solution. In 2012, former US Rep. Bachus (R-AL), then chair of the House Financial Services Committee, introduced a bill and held a hearing on the idea of moving RIA oversight to an SRO. The effort failed, and Congressional members and staff from that time remember the sting of that defeat to this day. Then, in 2013, the SEC’s Investor Advisory Committee recommended legislation to fund investment adviser examinations. Also in 2013, US Rep. Maxine Waters (D-CA) introduced the Investment Adviser Examination Improvement Act (H.R. 1627), to allow the SEC to impose user fees to fund adviser examinations. Letters, co-sponsors, and hearings followed. Rep. Walters also recently tried to add an amendment with respect to user fees to a FY2015 appropriations bill that funds the SEC and its activities, to no avail. In 2014, the new Office of the Investor Advocate submitted a report to Congress recommending funding for sufficient examination of advisers, noting it as “a substantial risk to investors.” And with this recommendation came a request for the authorization of user fees as a long-term funding solution to this gap. Throughout this time, groups have lobbied Congress on the oversight of advisers, and sentiment over whether FINRA is pursuing a role as adviser SRO has waxed and waned.

More recently, some advisers have started to consider the prospect of state regulators assuming oversight for a larger number of advisers over the next 10 to 15 years, eventually covering firms with assets under management (AUM) of up to $1 billion, compared with $100 million AUM today. The consideration is based, first, on a desire to avoid FINRA oversight, but also due to recognition that the SEC is unlikely to receive either sufficient appropriations or authority to charge and retain examination fees needed to adequately examine the growing population of advisers. Add to that the fact that the costs of a de novo SRO are likely prohibitively high, and that third-party examinations would likely create a myriad of conflicts, and the only remaining cost-effective alternative is for the states to step in for firms under the $1 billion AUM mark. That, however, likely would take upwards of a decade as state regulators grapple with the complexities related to the increase in number of firms overseen, their size, and their complexity.

CFA Institute agrees that conducting timely and thorough exams of investment advisers is critical to identifying potential practices and shoring up confidence in the industry. And we find it highly unfortunate that Congress has not responded to SEC requests with sufficient appropriations to help fund these examinations. Until the critical need for examinations occurring more frequently than once every 11 years (as was the case in FY2013) forces Congress to either provide sufficient appropriations or authorization for a sustainable alternative, the question of how (and by whom) adviser examinations will be overseen will remain.

With an abundance of complex macroprudential issues that continue to occupy the attention of market regulators and legislators, we hope that resolving this fairly straightforward issue might soon move to the front of everyone’s queue.

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About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, is a director of capital markets policy at CFA Institute. She focuses primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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