FINRA Executive Vice President Selman on the SRO Model as Applied to Investment Advisers

FINRA Executive Vice President Thomas M. Selman delivered a speech on regulatory policy at the Investment Program Association Fall Conference in Washington, D.C., in which he discussed his support for the SRO model of regulation. The background of his talk, or maybe the foreground, was the assumption that insufficient governmental resources are available to regulate investment advisers adequately. Thus, a question has arisen as to whether investment advisers should be regulated only by the SEC (which would, as a practical matter, require greater funding of the SEC) or also by an SRO (very possibly FINRA, which would obviously require advisers to pay fees to the SRO as all of this will require money).

The issues that he raises in his speech are (i) whether the SROs have been captured by the industry, making them ineffective; or (ii) whether the SROs are indifferent to the industry, making them too harsh. He argues that neither is true and says that FINRA has done quite a good job of regulation in general. Thus, he advances the argument for FINRA to become the SRO for investment advisers.

Lofchie Comment: I personally definitely do not believe that FINRA is in the least captured by the industry. As Mr. Selman says, the structure of FINRA--including both the degree of SEC control over FINRA and the fact that a majority of FINRA's board is made up public directors, prevents that. Even more importantly, in my view: FINRA's staff is made up of professional regulators who view their obligations as running to FINRA and to its goal of financial regulation--not to individual firms or firms' profitability. For me, the intellectual issue with FINRA is whether it is performing a governmental function, but without providing firms and individuals subject to its authority the same protections that are supposed to be afforded by those regulated, and some accused, directly by the government. (On the other hand, as a practical matter, no market participant really looks forward to going to court with the SEC, so maybe it does not much matter.)On a related note, some time ago, we published anews item in which the President of NASAA had criticized SRO (FINRA) regulation of investment advisers because he perceived it as a means for the federal government to preempt the authority of the states over investment advisers.

View speech in full here (links externally to FINRA website).