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How Should the SEC Increase Examinations of RIA Firms?

By George C. Miller, Esq.  of Shustak Reynolds & Partners, P.C. posted on Wednesday, October 7, 2015.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

For at least the past decade, financial advisers have been steadily moving from traditional broker-dealer firms to independent RIAs.  While brokerage firms are regulated by FINRA--and subject to rigorous FINRA examinations at least every two years--most RIAs are regulated by the SEC where, on average, RIA firms are examined just once every ten years.  While there are certainly benefits to investors working with an RIA--objective, unbiased investment advice, access to a wider suite of products and services etc.--one obvious drawback is the significant decline in regulatory oversight.  No doubt, ten years is more than enough time for "bad actor" advisers to do serious damage to their clients.  

This apparent gap in regulatory oversight has not gone unnoticed, particularly as more and more investors turn to RIAs for investment advice.  Susan Axelrod, vice president of FINRA's regulatory division, said she believes some advisers who leave FINRA for the RIA world are engaging in "regulatory arbitrage," escaping FINRA's strict oversight for the more relaxed SEC regulatory environment.  SEC Commissioner Daniel Gallagher, meanwhile, has said he believes there are more advisers in the RIA space that are violating the law than are being caught, but the SEC simply lacks the resources to adequately police the many RIA firms across the country.  That's why the SEC has, for the past few years, considered allowing third parties (and potentially FINRA) to help conduct RIA examinations.  

The SEC knows it has a potential problem on its hands but has yet to settle on a solution.  Allowing FINRA to participate in the examination process could help catch wrongdoing and rule violations, but it also would blur the lines of regulatory authority over RIAs.  Would FINRA then seek to enforce its rules over RIAs?  Would FINRA have the authority to discipline or bring an enforcement action against RIA firms? Would FINRA's examiners have the knowledge and background necessary to examine RIAs, who operate under many different business models and custodial arrangements?  All unanswered questions that would need to be addressed before expanding FINRA's authority over RIAs.  But as the RIA space continues to grow, this is an issue that must be addressed sooner rather than later.     

Shustak Reynolds & Partners is experienced with SEC investigations, enforcement proceedings and civil actions. Contact us today for more information.  



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