Will FINRA Become the New Regulator for Investment Advisers?

Yesterday, in front of the House Financial Services Capital Markets SubCommittee, Richard Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA) testified that FINRA is prepared to assume the regulation of investment advisers. Ketchum noted that while the SEC oversees more than 11,000 investment advisers, but in 2010 conducted only 1,083 exams of those firms due to lack of resources. Noting two studies related to the regulation of broker-dealers and investment advisers that were completed by the SEC in January, Ketchum stated, “the average registered adviser could expect to be examined less than once every 11 years.” This means that “[w]hile the SEC examines only about 9 percent of investment advisers each year, 55 percent of broker-dealers are examined each year by the SEC and FINRA,” he said.

The SEC’s study on investment adviser exams concluded that, going forward, the Commission would not have sufficient capacity to conduct effective registered investment advisers examinations with adequate frequency. Further, the study found that enhanced examination responsibilities given the SEC under Dodd-Frank meant that an increase in agency examination staff “is unlikely to keep pace with the growth of registered investment advisers.”

Making the argument that if FINRA were to become the SRO for investment advisers, Ketchum pledged that FINRA would establish a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area. He argued that FINRA possessed the experience operating a nationwide program for examinations and had the ability to leverage existing technology and staff resources to support a similar program for investment advisers. See more…

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.