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How Will RIA Regulation Change?

Financial Planning
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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.







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