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How Will RIA Regulation Change?

As the number of Ponzi schemes and investment frauds prosecuted by the U.S. Securities and Exchange Commission soared in recent months, so did the odds for change in the way small RIAs are regulated.

You don’t have to be a math genius to understand the calculus. In the last six weeks, the SEC issued press releases about prosecuting 18 fraud cases involving registered investment advisers, hedge funds, and Ponzi schemes. During the same period a year ago, the agency brought just six such cases. It prosecuted one such case during the same period in 2007.

Add to these grim statistics the Obama Administration’s vow to clean up Wall Street, massive mistrust in Wall Street, and the announced intention of the SEC chairwoman Mary Schaprio to “harmonize” RIA and broker regulations. The equation logically leads to one solution: RIAs are likely to be regulated by FINRA.

The coalition announced earlier this year of the Financial Planning Association, National Association of Personal Financial Advisors, and Certified Financial Planning Board of Standards is likely too little, too late. The coalition proposes creation of a new regulatory body to regulate financial planners. However, Congress is unlikely to complicate the regulatory framework further by supporting any effort to create yet another regulatory body that is new and has little history of regulating other than the 60,000 or so CFP designees.

I’m not an expert on Washington affairs but a proposal to create a new regulatory body to oversee financial planners would look wasteful, since a statutorily-empowered self-regulatory organization that regulates retail financial advisors already exists. While FINRA’s bureaucracy and history of being dominated by large Wall Street firms is likely to put RIAs in a bad position, it’s hard to imagine any entity other than FINRA taking the reins in regulating RIAs.

So it’s time to start wondering aloud about what it will mean if indeed FINRA becomes the regulator of RIAs. What will the new regulatory regime mean to RIAs and financial planning firms? Here are my guesses:

  • Compliance expenses for RIAs are likely to rise sharply once FINRA is in charge.
  • RIAs will be required to pay some additional fees to FINRA to help defray the cost of a FINRA examination program.
  • Instead of naming a junior-level employee your chief compliance officer (CCO), your CCO may have to pass an exam as is required by FINRA.
  • IA reps will have to pass a competency exam akin to the Series 7.
  • RIAs will be required to submit for review to FINRA client communications touching on certain subjects, such as limited partnerships, recommendations of stocks, mutual funds or derivatives, or that describe your performance history.

What do you think? Let the speculation begin.

7 Responses to “How Will RIA Regulation Change?”

  1. May 19th, 2009 at 6:22 am

    Mark Astarita says:

    Good article, and you are of course, correct as to the impact of FINRA regulation on Investment Advisors. There will always be additional costs to the IA once you add an additional layer of regulation, and it will be a boon for compliance officers.

    And regulation is coming. IA’s have flourished under the current SEC/State regulatory environment, but Madoff and his ilk have all but guaranteed that a new level of regulation is coming, and that regulation will be overkill. Our politicians have a history of over-reacting to whatever the current crisis is with a morass of hasty regulations that are not well thought out. Look at Sarbanes Oxley.

    FINRA oversight might not be a bad thing, and it will certainly be better than having Congress and the SEC try to set up a new set of rules. At least we all know what FINRA’s rules are and what the impact of those rules will be.

    And, at the end of the day, we might just wind up with stock brokers having a fiduciary duty to their customers, which will change over 80 years of law and regulation; and not for the better.

    In fact, sooner rather than later, we may see the ultimate merger of brokers and investment advisors, with investment advisors no longer existing as a separate type of registrant.


  2. May 19th, 2009 at 1:19 pm

    Andrew Gluck says:

    Rules faced by registered reps are a lot more complicated and specific than for for RIAs and IA reps.

    Just look at the difference the FINRA Manual at versus the SEC’s "Information for Newly-Registered Investment Advisers" at

    It’s a shame because the RIAs providing financial advice to individual investors had been such a clean area for decades until the Madoff mess and spate of recent scandals to follow.

  3. May 20th, 2009 at 12:53 pm

    Pat Allen says:

    I’ve been thinking that the reason Investment Advisors are more communicative on the Web is that they are not regulated by FINRA. Is that right–would you expect that a different advertising standard will be applied? One consequence of which would be that IAs will be discouraged from blogging, tweeting, etc.?

  4. May 21st, 2009 at 10:17 am

    Russell Dunkin says:

    Unfortunately I think you are right in concluding that the coalition of Planning Association, National Association of Personal Financial Advisors, and Certified Financial Planning Board of Standards is too little, too late. I earned my CFP(r)designation 2 years ago, and combined with working for a fee only RIA firm, I clearly saw the distinction between acting as a fiduciary, and my previous positions in the brokerage industry where suitability was the distinction. Hopefully the growing numbers of RIA firms and/or advisors will wake up and make their voices heard…although I also think that may be too little too late.

  5. May 21st, 2009 at 11:31 am

    Andrew Gluck says:

    I answered Pat’s question and responded to the comments at

  6. May 21st, 2009 at 8:22 pm

    Dan Young says:

    There is no doubt that many Reps have fled FINRA’s jurisdiction for the less onorous RIA regulatory structure.

    As a result of this fact, as well as the scandels of late, we are going to see more RIA regulation. Rules based structure, like that of BDs, will mean:

    1. More Audits;
    2. More costs;
    3. More compliance infrastructure; and
    4. Less discretion.

    One solution to the new regime is to outsource compliance. RIAs can hire firms to keep track of documents and information with technology. Firms such as E*Assist have already begun to develop the technology and models to accomplish this.

    The two alternatives to outsourcing are both flawed. One can bulk up internal compliance, but the cost may be prohibitive. Or, RIAs can take their chances and hope that the prediced audits will not come. I recommend against the latter.

  7. May 28th, 2009 at 12:23 pm

    Andrew Gluck says:

    Dan’s idea is the kind of constructive proposal RIAs should be discussing.

    My company is also working easing a growing compliance burden that will fall to RIAs in the new regime.

    I believe tools that empower compliance consultants to monitor advertising and other activities in RIAs are a big part of the solution.

    Firms like Investment Counsel and NRS need to be integrated into technology systems used by RIAs.

    It’s not so hard for a portfolio management, CRM, or financial planning application to give rights to a compliance consultant to monitor work performed by an RIA and generate reports for compliance specailists, or even alerts.

    RIAs should be talking about how they can use third-party compliance consultants to monitor their operations daily over the Web and tech vendors need to be mindful of this.

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