FINRA Pitches To Protect Investors from Bad Investment Advisers

Investment advisers may soon find themselves under the new regulatory management of the same group that is charged with arbitrating complaints against brokerage firms. 

Richard Ketchum, Chairman and Chief Executive Officer (CEO) of the Financial Industry Regulatory Authority (FINRA) testified before a U.S. House of Representatives subcommittee this week that the authority is ready to take over the oversight of investment advisers from the resource-strapped Security Exchange Commission (SEC).

The SEC is only able to take a close look at the activities of those who advise investors on where to put their money once every 11 years.

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FINRA is currently charged with regulating brokerages and securities representatives, including the determination of investment fraud lawsuits through an arbitration process.

Stepping in to take over the SEC’s regulation of investment advisers would be a significant expansion. It is also an expansion that has some in the investment adviser industry worried.

It is believed FINRA would be able to conduct much greater scrutiny of investment advisers, who have been given a fairly free hand by the SEC, which is stretched thin.

During testimony presented Tuesday, Ketchum argued that FINRA already does a lot of the heavy lifting, since 88 percent of all registered advisery representatives are also work for brokerages which FINRA already oversees.

“While broker-dealers and investment advisers are regulated differently, the reality is — as the Rand Corporation said in a study completed for the SEC in 2008 — that ‘trends in the financial service market since early 1990s have blurred the boundaries between them,’” Ketchum said in his statement. “Many customers now hold investment adviser and brokerage accounts with the same firm and rely on the same financial professional who is registered as both a broker-dealer and an investment adviser representative.

FINRA is a non-governmental regulatory body that handles the resolution of disputes between investors and stockbrokers and other financial firms. It was created in July 2007 as a successor to the National Association of Securities Dealers, to arbitrate stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.

Much of the recent impetus to place FINRA over investment advisers came from the fallout of the Bernard Madoff Ponzi scheme. Madoff defrauded billions of dollars from thousands of investors, which the SEC failed to detect despite what some said were obvious signs of a problem. 

Ketchum said that FINRA ordered nearly $6.2 million in restitution in 2010 for investors who were harmed by bad brokerage practices or decisions. The authority also brought 1,310 disciplinary actions and collected more than $42 million in fines. It also barred 14 firms and 288 individuals from doing business in the industry.


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