Merge Finra and SEC’s Adviser-Oversight Arm, Says TowerGroup
January 6, 2009
The Securities and Exchange Commission’s investment adviser regulatory functions should be rolled into the Financial Industry Regulatory Authority (Finra), says research firm TowerGroup. Finra’s oversight of investment advisers is currently limited to those that maintain a broker-dealer.
Needham, Mass.-based TowerGroup believes a merger would address what some see as the SEC’s failure to adequately police investment advisers by leveraging Finra’s resources, principally in the examination area. “From our perspective, the teeth to do this already exist at Finra if they are allowed to use them,” said senior research director Matthew Bienfang. “The SEC also has the teeth; they just don’t have the resources.”
While TowerGroup has been discussing the idea with clients, according to Bienfang, it had not floated the recommendation publicly until now. “The SEC has consistently demonstrated that they do not have resources or experience at the retail-investor level to conduct the oversight required,” he explained. “And events have shown that there are holes that need to be filled. Finra’s resources are much greater from an examiner standpoint.”
The combination would involve the part of the commission’s office of compliance inspections and examinations (OCIE) that oversees its examination program for investment advisers. “It is really a training issue,” said Bienfang, who pointed out that the SEC has fewer than 300 examiners, with less than 100 devoted to advisers.
At the same time, the budget of self-regulatory organization (SRO) Finra has been “decimated,” said Bienfang. “They get about 60 percent of their operating budget from 30 percent of their member firms, many of which no longer exist. They have real budget issues right now.”
There is broad agreement that supervising about 14,000 registered investment advisers poses a challenge that is not being adequately met. But while there is a regulatory vacuum, Brian Rubin, a Washington, D.C.-based partner at law firm Sutherland Asbill & Brennan, said that the solution is a new entity. “I see the possibility of an SRO to regulate investment advisers,” said Rubin, a former deputy chief counsel of enforcement at Finra predecessor NASD. “The SEC does not have the resources or the time.”
The issue has become more acute as financially strapped advisory firms come under growing pressure to cut compliance costs, even as arbitration claims soar. According to preliminary numbers from Finra, there were 4,900 claims in 2008, up from 3,228 in the prior year. Under such conditions, a movement toward greater oversight is inevitable, said Bienfang. “Unfortunately, I think there will be a lot of demand for more government control,” he said. “I think we are at the point now where Congress will want to support its constituents’ concerns.”
As the largest SRO for U.S. securities firms, Finra supervises about 5,000 brokerages and 680,000 registered representatives. Its CEO, Mary Schapiro, was recently tapped by president-elect Barack Obama to succeed Christopher Cox as chairman of the SEC. No replacement has been named.
