As some readers may be aware, I’m currently one of three industry representatives running for a vacant seat to represent small broker-dealer firms on the FINRA Board of Governors. The suggestion was first made to me by Joel Blumenschein, the seat’s former occupant, who attended meetings I coordinated with senior FINRA staffers and was copied on several pieces of correspondence I had with those staffers as well as FINRA CEO Rick Ketchum.
My candidacy has recently been profiled in several publications, including Investment News and subsequently a guest column from NAPFA head Ron Rhoades on RIABiz. Based on his column, it appears that Mr. Rhoades and I share many of the same views on the role of regulators and the need to keep FINRA away from the world of investment advisors.
What I did not have the chance to share in my original Investment News article, which may have been interesting for readers, is my reason for maintaining this view.
As I have expressed to FINRA CEO Rick Ketchum on several occasions (FINRA is currently lobbying Congress to enact legislation forming a Self-Regulatory Organization for IAs – FINRA wants the job) for FINRA to gain oversight in the Investment Advisor space would be disastrous in the long run. FINRA, which was created in a 2007 merger between the NASD and the regulatory arm of the NYSE, has since undergone a serious shift in culture that has led this industry-funded regulator to think and act more like an agency of the federal government. In the process it seems to have forgotten who its clients are (read: who pays its bills), and the declining number for brokerage firms and registered reps over the past 5 years clearly show their frustrations resulting from increased scrutiny.
My concern is that if FINRA is granted oversight of Investment Advisors, there will be a shift away from that space – much the way there has been a shift away from the brokerage world (to IA-only) since the NASD became FINRA. If FINRA begins regulating IAs, it will likely drive a large number of those firms to deregister entirely in favor of opening hedge funds, private equity groups, holding companies, or other less-regulated entities. This move would mean even less oversight, leaving much of the investing public largely unprotected. The number of Bernie Madoffs that would emerge within 5 or 10 years would be truly astounding.