Bloomberg News

Finra Backs Bachus on Regulating Advisers, Luparello Says

October 05, 2011

(Updates with details on possible Finra governance changes in paragraph above ‘Adviser Examinations’ subheadline.)

Oct. 5 (Bloomberg) -- Legislation authorizing one or more self-regulatory organizations to oversee registered investment advisers is “directionally, exactly what we want,” said Stephen Luparello, vice chairman of the Financial Industry Regulatory Authority.

“As we look at it now, I don’t think there’s anything in there that would compromise us or any other organization that wanted to step up and be an SRO,” said Luparello of a draft bill circulated by Representative Spencer Bachus, an Alabama Republican, at a Financial Services Institute Inc. conference in Washington today.

Much of the costs of assuming oversight of investment advisers as a self regulator are already embedded in Finra’s infrastructure, according to Luparello, who oversees regulatory operations for Finra, which is funded by the brokers it regulates.

His comments came as Congress is considering whether to name a self regulator for registered investment advisers. Richard Ketchum, chairman and chief executive officer of Finra, told a subcommittee of the House Financial Services Committee Sept. 13 that his group was “uniquely positioned” to handle the job.

Bachus, who leads the full committee, proposed draft legislation last month that would charge one or more self- regulatory groups, under the authority of the U.S. Securities and Exchange Commission, with overseeing registered investment advisers. The proposal didn’t specify whether the self regulator should be Finra or another group.

SEC Report

The SEC released a report in January recommending three options for enhancing oversight of registered investment advisers including levying user fees on advisers to fund examinations by the SEC, authorizing a self-regulatory organization to oversee the industry and giving Finra authority to examine advisers that are also registered as broker-dealers.

Ketchum told lawmakers that Finra would create a separate unit with separate governance to oversee registered investment advisers if that’s what Congress decides.

“Self regulation is by definition suspect because it’s the industry regulating itself,” said David Tittsworth, executive director of the Investment Adviser Association, which represents SEC-registered investment advisers. “The SEC is fully accountable to Congress and to the public.”

Necessary Experience

Finra has the necessary experience, resources and track record to oversee investment advisers, William Dwyer, chairman of the Financial Services Institute and president of national sales and marketing for Boston-based LPL Investment Holdings Inc., said in a written testimony to the Capital Markets Subcommittee on Sept. 13. The Financial Services Institute is a membership and lobbying group for independent broker-dealer firms.

The draft legislation from Bachus is “an overreaching solution to inadequate SEC funding,” Jack Herstein, president of the North American Securities Administrators Association, said to the conference yesterday. His group, which represents state securities regulators, “vigorously” opposes a self- regulatory organization that would oversee state-registered investment advisers, he said.

“If the goal is investor protection, then the shortest distance to that goal is to ensure the SEC is adequately funded,” he said. “We see little benefit in constructing a new layer of bureaucracy.”

Cultural Clash

There would be a cultural clash if Finra were to regulate investment advisers because the group’s oversight of brokers tends to focus on standards around products, said Knut Rostad, president of the Institute for the Fiduciary Standard, a group of financial professionals that lobbies for a standard to apply to all those who provide investment advice.

“When you look at what brokers must be most attuned to in the trenches, it’s all revolving around the distribution, the communication about and the advertising about the product, as opposed to the overriding focus of the SEC with advisers, which is focused on putting investors’ interests first,” Rostad said.

Finra would tailor its oversight to the investment-adviser business if it became the industry’s self regulator, Luparello said.

“We would not force broker-dealer requirements on investment advisers,” he said.

The group may set up a separate affiliate with a board of public representatives and members of the adviser industry if it became the regulator for investment advisers, Luparello said.

Adviser Examinations

There were about 11,888 federally registered investment adviser firms managing about $38.3 trillion in 2010, according to the January SEC report. The number of advisers has increased by about 39 percent from 2004 when there were 8,581 advisers managing about $24.1 trillion. Registered investment adviser firms provide advice to investors including individuals and institutions.

The average registered investment adviser is reviewed by the SEC less than once every 11 years given the current rate of examinations, according to the report. Finra and the SEC examine about 55 percent of broker-dealers each year by contrast, Luparello said.

--With assistance from Jesse Hamilton in Washington. Editors: Alexis Leondis, Rick Levinson.

To contact the reporter on this story: Elizabeth Ody in New York

To contact the editor responsible for this story: Rick Levinson at

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