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RIA Regulation Moves Forward

By Ray Sclafani | May 1, 2012

Ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010, RIAs have been wondering what regulatory agency they would ultimately answer to. While that question still hasn’t been resolved, Sen. Max Bachus introduced legislation last week that would transfer regulation of RIAs from the Securities and Exchange Commission (SEC) to a separate agency, most likely the Financial Industry Regulatory Authority.

This issue isn’t without controversy, to put it mildly. Many RIAs aren’t thrilled at the thought of being regulated by FINRA (which currently regulates brokers) because they believe FINRA isn’t equipped to enforce the fiduciary standard and prefer SEC oversight. FINRA, for it’s part, is eager to consolidate its influence and authority over the industry and has lobbied for this power ever since Dodd-Frank passed.

It’s a complicated situation and a complex decision for Congress for a number of reasons, including:

  • The fiduciary standard: The SEC still hasn’t set a uniform fiduciary standard for RIAs, brokers and others who work with consumers in a financial advisory capacity and sell stocks, mutual funds, insurance and other products to consumers.
  • Regulatory authority: While self-regulatory organizations (SROs) such as FINRA do have the authority to police their members, the public typically has more confidence in the authority of government agencies such as the SEC. That’s a major reason why RIAs would prefer to be regulated by the SEC.
  • Costs: The cost issue runs both ways. The first concern is that the SEC doesn’t have the manpower or budget to appropriately police the new regulations that apply to RIAs. The second concern is that the cost for RIAs would rise if regulatory authority was transferred from the SEC to an SRO.
  • FINRA or another SRO?: Even if regulation of RIAs was transferred from the SEC to an SRO, FINRA isn’t the only answer. A new SRO could be created to solely oversee RIAs; in fact, the Bachus bill doesn’t rule that out. University of Mississippi Law Professor Mercer Bullard, a well-known advocate for consumer shareholders in mutual funds, has launched the Self-Regulatory Organization for Independent Investment Advisors (SROIIA), a SRO that would exclusively regulate RIAs.

So what’s our take here at ClientWise? As a coach for both RIAs and financial advisors who operate under broker-dealers and wirehouses, we are very cognizant of the impact of regulatory changes on both groups. It seems wisest to resolve the fiduciary standard issue first via the SEC, then decide on the most appropriate regulatory structure, whether that’s the SEC, FINRA or another SRO.

For more food for thought on this issue, which will still likely take months to resolve, here are some interesting articles, videos and blog posts:


As the saying goes...stay tuned!


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