The NAIFA Board of Trustees has voted unanimously to recommend that the Financial Industry Regulatory Authority (FINRA) serve as the self-regulatory organization (SRO) to conduct examinations of Securities and Exchange Commission-registered investment advisers.
In response to a directive in the Dodd-Frank Act, the SEC issued a staff study earlier this year about enhancing the investment adviser exam process and offered three options: authorize one or more SROs to examine advisers, impose fees on advisers to fund SEC exams, or authorize FINRA to examine dually registered advisers.
NAIFA believes the most efficient, cost-effective answer is to authorize FINRA to conduct all RIA exams. FINRA is already subject to SEC oversight, and it would be easier for FINRA to expand its current, substantial examination capabilities to cover RIAs than it would be to establish new SROs or significantly increase SEC exam programs.
“NAIFA supports reasonable examinations to ensure that financial professionals are complying with the law. Statistics have made it very clear that investment adviser examinations are not occurring with sufficient frequency. Because NAIFA members are already subject to comprehensive broker-dealer regulations, engaging FINRA to examine SEC-registered investment advisers will be the most efficient option for dually-registered NAIFA Members” said NAIFA President Terry K. Headley.
In written comments to the SEC on a related Dodd-Frank subject, NAIFA reported that FINRA examines 55 percent of broker-dealers each year. In contrast, the SEC has reported that only 9 percent of RIAs face SEC examinations annually and a full one-third of RIAs have never been examined. The SEC has stated that it lacks the necessary funding to effectively increase its oversight and examination of RIAs.
NAIFA’s comments were written in response to the Dodd-Frank requirement that the SEC examine how the suitability standard governing broker-dealers is applied and enforced relative to the fiduciary standard governing investment advisers.
Approximately 27 percent of NAIFA members are investment adviser representatives according to a survey conducted by LIMRA International. Of these, nearly all are dually-registered as registered representatives of broker-dealers, and thus, already subject to FINRA regulatory oversight. Only 1 percent of NAIFA members are registered investment advisers not currently under FINRA’s regulatory jurisdiction.
In addition, most NAIFA members are community-based small business owners, who provide affordable insurance and financial services to the middle-income market. They are also some of the most comprehensively regulated individuals in the financial services industry.
“Our goal in supporting FINRA as the SRO is to achieve efficiencies and avoid unnecessary duplication in the examination of dually-registered NAIFA Members,” Headley said. “Simultaneous broker-dealer and registered investment adviser examinations would be less burdensome and intrusive than having to submit to different exams at different times in order to comply with different regulators. It just makes sense, in order to achieve cost-effectiveness and reduce the potential for an overlapping examination process.”
Additional Resource:
InvestmentNews article on NAIFA's decision.