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Investment Advisers Object to New Regulatory Regime

Independent advisers complain that the Financial Industry Regulatory Association has no business overseeing them because they aren’t affiliated with broker-dealers, and that the quality of their advice would suffer as a result.

Christopher Cannon, an independent financial adviser based in Daytona Beach, Florida, is an accidental lobbyist. Cannon, a partner at private wealth management firm ­FirsTrust, attended a presentation by a representative from the Financial Industry Regulatory Association explaining why Finra should oversee registered independent advisers (RIAs) such as himself. One of the rep’s main arguments, as Cannon recalls, was that the Securities and Exchange Commission had failed to catch Bernard Madoff. Cannon shot back: “Wasn’t Madoff also regulated by Finra?” The rep changed the subject and moved on, but ­Cannon hasn’t. He is determined to have his say about which agency will regulate him. “What really got my blood boiling,” Cannon tells Institutional Investor, was a later statement from House Financial Services Committee chairman Spencer Bachus. “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,” said Bachus, a Republican from Alabama. “For broker-dealers that’s true, but for investment advisers it’s all too often not true, and that must change.” Cannon, who has a different opinion about the issue, fired off an e-mail to Bachus, whose office asked for more information for a possible meeting. These experiences have transformed Cannon into something of an activist, a personal story emblematic of the way many RIAs have reacted to potential changes to their regulator. Currently, RIAs are regulated primarily through the SEC or state agencies. In contrast, advisers affiliated with brokerages are regulated by Finra, the broker-­dealers’ own self-­regulatory organization. Pending legislation would change this arrangement. A bipartisan bill Bachus introduced in his committee in April with New York Democrat Carolyn McCarthy aims to provide better oversight of financial advisers. It would accomplish this through “one or more self-­regulatory organizations,” to be inserted under the SEC. Finra is the natural candidate for this role, and so could expand its turf to include RIAs in addition to reps from Wall Street firms. For the members of the independent advisory industry, the idea of being overseen by an SRO composed of their chief competitors doesn’t sit easily. Such an arrangement, they argue, would level the playing field downward, eliminating advantages RIAs hold, notably their high fiduciary standards that put clients first. “Finra has historically offered oversight for the broker-­dealer community [that operates] under the lower ‘suitability standard,’” says Blaine Aikin, president of fi360, a company that provides training tools to RIAs to support fiduciary responsibility. Wirehouse reps’ primary loyalties are to their parent broker-­dealers, he contends, whereas RIAs owe their primary loyalties to their clients. “These distinctions could become blurred,” he says. David Tittsworth, executive director of the Investment Adviser Association, which represents SEC-­registered advisers, agrees: “Moving to a self-­regulatory organization creates a conflict of interest, and we are opposed to it.” Finra, for its part, asserts that there would be no watering down of standards if it wins the oversight role. ­Richard Ketchum, CEO of Finra, testified before the House that “Finra has been clear in its view that the standard of care in both [RIAs and broker-­dealers] should be a fiduciary standard for the provision of personalized investment advice to retail customers.” Further, Ketchum noted that many reps are dually registered and are subject to different regulatory standards, creating conditions ripe for both regulatory arbitrage and customer confusion. Bringing in an SRO like Finra “provides more boots on the ground, and investment advisory customers deserve this additive layer of protection,” says Finra spokeswoman Michelle Ong. Chris Cannon and like-minded RIAs aren’t buying it. “I’m fed up hearing bad regulation, bad policy and predictably bad outcomes being sold as the best solution,” he says. “It ultimately all smacks of crony ­capitalism.” Meanwhile, hearings about who will come to regulate RIAs were due to commence on June 6, one day before a lobbying day announced by ­Tittsworth’s Investment Adviser ­Association.

Cannon, who is meeting with Bachus on June 8,  is also pursuing an audience with other members of Congress this summer. “I’m just an ordinary guy who got angry when it became clear what was happening,” he says. “I want the good guys to win because that means the investing public wins. And for me this means screaming my message from the rooftops.”

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