The investment realm is a complicated place. There are a lot of players involved in a lot of activities. As we have learned from recent experience involving mortgage-backed derivatives, sometimes the players don't even know what they're up to. Is it any wonder that regulators find it hard to exercise some measure of control to protect investors against financial fraud?
Another factor that may contribute to the confusion is that not all the same rules apply to the various players. For example, the broker contingent on the field is ostensibly under the thumb of the self-funded Financial Industry Regulatory Authority (FINRA). As we've noted before, that organization faces some interesting challenges.
Then, there is that body of individuals known as registered investment advisers (RIAs). They are supposed to be under the regulatory control of the Securities and Exchange Commission. The problem, though, according to the SEC, is that it doesn't have the resources to do the job. Officials say they are so understaffed they only check up on RIA firms an average of about once every 10 years.
And as readers of this blog know, even with regulators in place, financial fraud and broker malfeasance still occurs, requiring the assistance of an experienced attorney.
There was a period of time when the SEC was looking to hand off some of its RIA regulatory functions to FINRA, and FINRA was willing to take them on. But the notion of that reportedly didn't settle well with most investment advisers. They apparently aren't enamored with how FINRA handles enforcement and reportedly fought back, complaining that FINRA doesn't understand how they work.
It appears the core issue may have been that brokers aren't required to always operate in the client's best interest, and RIAs are.
FINRA's chief executive, Richard Ketchum, told The Wall Street Journal that he supports the idea of brokers and RIAs sharing the same standard of fiduciary responsibility to clients, but he now doesn't think a merging of authority under FINRA would succeed. He says the better thing would be for Congress to give the SEC what it needs so it can properly police RIAs.
Source: The Wall Street Journal, "Finra Backs Off From Expanding Oversight," Matthias Rieker, April 10, 2014