Compliance

Interview: Mercer Bullard On SROIIA, A Potential FINRA Challenger

Amy Buttell Correspondent Pennsylvania 25 July 2011

Interview: Mercer Bullard On SROIIA, A Potential FINRA Challenger

When University of Missouri law professor and Mercer Bullard proposed the idea of creating an SRO for independent investment advisors to his law students, it was a project to give students employable skills. But in the wake of Dodd-Frank, that project took on additional relevance.

When University of Missouri law professor and long-time consumer advocate Mercer Bullard proposed the idea of creating a self-regulatory organization for independent investment advisors to his law students, it was just one potential project among many designed to give students experience that would make them more employable after graduation. In the wake of Dodd-Frank, that project took on additional relevance as the SEC was charged with defining and regulating wider implementation of a fiduciary standard.

Several students expressed interest in the idea and picked up the ball and ran with it; they are on the verge now of launching a website for the Self-Regulatory Organization for Independent Investment Advisors (SROIIA), a potential competitor to the Financial Industry Regulatory Authority (FINRA), Bullard says. FINRA is a large and established self-regulatory organization (SRO) for broker-dealers and registered representatives that has ambitions to regulate independent investment advisors.

Bullard, advisor to the Law School’s Business Law Society, is advisor to the project and says the students have made a good deal of progress, but need to continue to develop the website and work on examination modules if they are to mount a viable alternative to FINRA. They have time however, as Congress must pass legislation regarding the regulatory structure for independent investment advisors and the SEC must settle on a definition of the fiduciary standard to expand to broker-dealers, registered representatives and other investment advisors - something which may not happen until next year, he says.

SROIIA’s mission

SROIIA’s sweet spot centers around independent investment advisors, who currently adhere to a so-called “high” fiduciary standard, where the clients’ interest is placed above that of the investment advisor. Bullard believes that investment advisors, many of who are Certified Financial Planners, would prefer to be regulated by their own SRO than FINRA.

In addition, one mission of SROIIA is to cut the costs involved in regulation – especially in regard to examinations of advisors – to lower the barrier for those professionals interested in becoming independent investment advisors who are deterred by the costs, as well as for those who would like to serve the vast majority of Americans who either can’t afford advice or who are put off by its relatively high cost.

“In my view, SROIIA could serve a broader contribution to help solve the problem of offering advice to the low end of the market as either a regulator itself, or if that doesn’t work out, as an intermediary between regulators and advisors,” Bullard says. “SROIIA could work with back-office providers to set up a self-examination package that would enable new advisors to roll out a new financial planning firm at a very low cost.”

As an SRO, SROIIA would focus almost exclusively on the Registered Investment Advisors industry, which comprises about 30,000 to 40,000 individual firms, which don’t seem to Bullard to be a very good match for FINRA, as that organization tends to deal with much larger firms with different types of risks. While many RIAs would ultimately prefer to be regulated by the SEC, the SEC doesn’t have the funding to undertake such a task and isn’t likely to get it, according to Bullard.

SROIIA plans to implement an examination program tailored to individual investment advisory firms, rather than a one-size-fit-all approach to examinations and provide active compliance assistance to firms. Examinations would cover all registered firms rather than selected firms and would be based on the high fiduciary standard.

SROIIA’s challenges

Challenges facing SROIIA include the fact that it’s staffed primarily by law students who work on it on a part-time basis in addition to their law school work. Also, it’s far from clear exactly how the fiduciary standard will be implemented by the SEC, or when Congress will pass a law designating the regulatory structure, Bullard says. He expects a bill to come from the House by the end of the year but believes the Senate is unlikely to act so quickly.

However, both the House and the Senate could act more quickly. And when they do act, if they authorize an SRO, SROIIA needs to be ready to file an application quickly, because FINRA will likely do so, Bullard notes. “For SROIIA to succeed it will need to hit the ground running and get an application in quickly,” he says.

While FINRA is lobbying Congress and RIAs on the idea that it can handle the additional responsibilities, FINRA isn’t a slam-dunk, Bullard says. “SROIIA has a couple of selling points,” he adds. “The organization is committed to streamlining the examination process and to establishing a good relationship with state regulators. It’s also committed to serving the RIA market for advisors who are already under the fiduciary standard.”

A question surrounding separating regulation of investment advisors from that of broker-dealers and other financial advisors is whether it would create confusion in the market for consumers, which the SEC is trying to avoid, and whether it would reinforce the idea of two separate fiduciary standards rather than the uniform fiduciary standard, which the SEC seemingly favors, Bullard says. Those issues will have to be sorted out as the whole process moves through the regulatory and legislative arenas in the next year or so. 

This is the third in a series of article on the fiduciary standard, to view an article on the cost debate, click here, and to view an article on potential regulatory outcomes, click here.

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