May 1, 2012
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By now, I'm sure you've heard that the chairperson of the House Financial Services Committee and a member of the Committee – Spencer Bachus and Carolyn McCarthy, respectively – have introduced new legislation to authorize "one or more self-regulatory organizations" for investment advisors, which would be funded by membership fees. You can find a copy of the bill here. It is a bipartisan bill, sponsored and supported by both parties, which makes it that much scarier for the profession.
It has long been clear that Rep. Bachus speaks as a proxy for FINRA on the subject of "enhanced" regulation, and I don't think anybody close to the profession can see this as anything but a way to let FINRA take over regulation of the fiduciary RIA profession. The press release accompanying the legislative proposal goes so far as to praise the diligent regulation of broker-dealers and the lax regulation of RIAs. I think this one line offers particular insight into where this legislation is coming from:
“Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change,” concluded Chairman Bachus.
In other words, the RIAs are the bad guys in the marketplace, who must be watched much more vigilantly, while the brokerage firms are the good guys who protect consumers.
This, of course, is taken straight from the mouths of FINRA and SIFMA, and it is not hard to find out why this particular legislator has been so persistent on this subject. When you look up where the lobbying money has gone, you find that Rep. Bachus's top ten contributors include commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and "miscellaneous finance" ($89,250). In the 2011-2012 election cycle, he was the number one fundraiser from commercial banks, from finance/credit companies and also from mortgage bankers and brokers. (All of that can be found here.)
I honestly don't want to overhype this or scare people unnecessarily, but I'm not the only person who believes that FINRA regulation of RIAs would sound a death knell for fiduciary RIA advice. It is easy to envision regulation upon regulation pounded down your throats, and enforcement of every inadvertent foot-fault which tarnishes your reputation compared with the "good guys" in that brokerage office down the street.
I would recommend that everybody reading this contact your elected representatives and tell them that this legislation (these are the key words) would be detrimental to the small businesses in their district or state. Below is a sample letter for you to send to your elected representatives, and a press release for you to send to your local paper and press contacts. Please feel free to edit or amend this, and in the press release you should add your own quotes and contact information. Some of the press release materials can be used in anything you want to send to your clients; I tried to lay out everything that a writer/reporter would need to craft a very strong article on this subject, including some fascinating information at the end about the "public" members of FINRA's board of governors, about the Madoff connection with FINRA, staff salaries, transparency, Rep. Bachus's campaign coffers and everything else.
Beyond that, if you think passage of this bill is inevitable, backed as it is by the power of FINRA lobbying muscle, plus the brokerage industry's lobbying dollars, plus the Financial Services Institute's strong and vocal support, then there really is only one alternative. The profession has to put together a strong proposal of its own for how best to protect consumers – one that is hostile only to the malefactors and bad folks who (we all know) will enter the profession from time to time.
Fortunately, we're already moving down this path. In one of my previous e-columns, I asked advisors to give me their thoughts and ideas about what better regulation would look like.
Here, in broad outline, are the recommendations I received back. Please read and offer feedback and comments, so we can hone this down to something that is workable and also reflects a consensus in the profession (the more detail, the better):
The regulatory agency should also function as a compliance resource for the RIAs that it regulates. Some of its resources would be devoted to creating compliance best practices, consulting with advisory firms on the best way to make their books and records compliant, and the fiduciary processes that could be implemented in advance to make an on-site inspection less painful and more time-efficient for the inspection team.
In addition to being proactive in helping its "members" (the Bachus bill would have the regulated RIAs be members of the SRO) stay compliant, the regulator would help develop an effective compliance software platform with third-party vendors. Which leads us to the second suggestion:
Develop a way to monitor RIAs remotely, by having members (or their software) automatically and electronically submit client account information that would be matched up with the custodian's records. The goal here is to address the biggest danger to consumers: that the client's money is where the advisor says it is, down to the penny. The regulatory agency could conduct these audits as frequently as necessary, and much of the work would be automatic – requiring little staff time.
Interestingly, there were several detailed recommendations about this process. One of the more interesting ones: have a consolidated figure at the advisor's office (the total dollars under management) match up with the consolidated figure at the custodian's. Is any money missing anywhere?The goal is to address the biggest consumer protection need: confirm that the investor's money is safely in the hands of the custodian, in the amount that the advisor is reporting.
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