A coalition of financial planning experts urged lawmakers to keep the U.S. Securities and Exchange Commission in charge of investment advisor regulation for the sake of cost and efficiency, just days ahead of several federal reports on the industry due next week.
The studies set to come from the SEC and Government Accountability Office follow efforts to ramp up financial regulation after the Dodd-Frank Act was passed last year. The three federal studies will examine how frequently investment advisors should take exams and who will regulate them, if financial planners should answer to more regulation and if the fiduciary standard should be extended to include broker-dealers.
On the last point, the battle for a uniform fiduciary standard has been ongoing for years. Currently, investment advisors (or advisers) are required to act as fiduciaries, requiring them to put the client’s best interests first. Meanwhile, broker-dealers may or may not be held to that standard, based on the circumstances of their relationship with particular clients. As a result, at times, broker-dealers rely on the suitability standard. Investment advisors want the single, one stringent standard of care applied to everybody but the broker-dealers say suitability is enough.
The question as to the SEC’s role with investment advisors going forward comes as regulators are set to decide if investment advisors should face more frequent and rigorous exams. There are a couple of options as to which agency will provide that greater regulation. One includes giving that power to FINRA (the Financial Industry Regulatory Authority) while another is to create a new self-regulatory organization.
But having a new entity take on that oversight responsibility will only weigh down the system with too much cost or limited expertise, argued the Financial Planning Coalition, which includes such organizations as the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors.
Support for the SEC as the main regulator praise from the coalition’s members.
“The SEC is experienced. They’ve got the infrastructure,” said Dan Barry, managing director of government relations and public policy at the Financial Planning Association. “That’s the best use of resources is to properly, adequately fund the SEC to conduct examinations.”
Changing that oversight to FINRA would require that industry to create a separate entity or restructure their governance because it’s currently a broker-dealer self-regulatory organization, Barry said. Creating an entirely new self-regulatory organization, or SRO, would take much more time and money because of the required funding and legislation, Barry said.
After what would likely be a slow move through Congress, Barry said, that SRO would then have to go through the processes of getting established and hiring the necessary staff.
“It’s simply not a good use of limited resources,” Barry said.
If the SEC does decide to create an SRO, according to the coalition, key factors should be considered such as if it should exclusively focus on investment advisors, if it should have a majority public board, what expertise the staff will need and if it should work with outside industry advisors.
At the same time, the coalition also urged that fiduciary standards currently applied to investment advisors be extended to include broker-dealers as well. Those broker-dealers currently answer to suitability standards, which do not require them to disclose conflicts of interest, commissions on products or other options that their client could choose. Those rules would also apply to insurance agents doing business as registered reps.
Regulating broker-dealers would make it easier for the consumer who might not be able to distinguish between the ranks of financial professionals, said Nancy Hradsky, special projects manager at the National Association of Personal Financial Advisors.
“My mom, who is a bright person, doesn’t understand the difference between a registered rep and a registered investment advisor,” Hradsky said.
The coalition also advocated for overall increased regulation for the financial planners, who are not subject to formal competency or ethical standards.
In addition, the coalition argued for more defenses for the consumer and better industry transparency.
The coalition’s stance is not directly tied to the decisions of the SEC and GAO offices considering them. If next week’s reports are not in line with their positions, the coalition said it plans to petition Congress.
Whichever way the agencies decide to proceed, the next issue is cost, as the Dodd-Frank legislation does not include self-funding. Costs could be covered through fees paid to the SEC or through taxpayer dollars, Barry said. Increased costs for advisor oversight could come from user fees generated by the SEC or a new SRO.
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