The Securities Litigation Expert Blog

Finra Reflects on the SRO Model

Posted by Jack Duval

Nov 20, 2012 3:50:52 AM

Finra Executive Vice President, Thomas M. Selman, spoke at the Investment Program Association Fall Conference on November 15, 2012 and made some interesting comments.  (IPAFC)  I have extracted some of the better parts below.

Here's another pitch for Finra (and not the SEC) to regulate Investment Advisors:

Despite the longstanding faith in the SRO model, it became a point of discussion in the recent debate about how to improve the oversight of investment advisers. As you are aware, investment advisers are not required to join an SRO. The SEC examined only 8 percent of SEC-registered investment advisers in 2011. By contrast, the SEC and FINRA examine about 55 percent of all broker-dealers every year. Almost 40 percent of all SEC-registered advisers have never been examined. The absence of regular examinations of investment advisers poses a threat to their customers. This is a fact upon which virtually everybody agrees, including the SEC staff, FINRA and even the investment adviser industry. The only disagreement has been the manner in which this problem should be solved. The investment adviser industry supported a user fee to fund SEC examinations. FINRA supported statutory authority for the SEC to designate one or more SROs for the investment adviser industry. The principal responsibility of these SROs would be to examine investment advisers for compliance with their statutory requirements and to enforce those requirements.

On the valuation of unlisted REIT and DPP securities:
With these thoughts in mind, I commend the Investment Program Association for the steps it's taken to improve business practices in your industry. I commend the IPA's commitment to establish guidelines for the valuation of unlisted REIT and DPP securities. As you know, the valuation of these securities has been the subject of concern at FINRA. In Regulatory Notice 12-14, we requested comment on a proposal to amend Rule 2340 to address the per share estimated values at which unlisted REIT and DPP securities are reported on customer account statements. Industry commenters generally supported our proposal, and we are considering these comments as we prepare a rule filing with the SEC.

As you are undoubtedly aware, the manner in which unlisted REITs are marketed and sold to retail investors was the subject of our recent enforcement action in the David Lerner case. FINRA will not tolerate abusive marketing practices by broker-dealers in the distribution of any security. Your support for new approaches to the regulation of the unlisted REIT and DPP market, such as vigorous standards for valuing, marketing and selling those securities, is the type of support that will improve the public perception of your industry.

Regarding the reasonable basis suitability determinations of private placements offered by broker-dealers:
Of similar concern is the private placement market. On December 3rd, new FINRA Rule 5123 goes into effect. This rule requires a notice filing requirement for some types of private placements. It will enable us to better police the private placement market, which has been the source of many instances of abuse. In our administration of this rule, we will be particularly interested in the extent to which a broker-dealer selling a private placement has undertaken a reasonable inquiry concerning the security and the issuer.

Lastly, of note is this last bit: "We have posted a position for a Chief Economist who will build economic analysis into our significant rulemaking."

Readers of this blog know that we have been following the REIT/DPP valuation issue for some time.  A previous post can be found here.

Likewise, our previous coverage of the reasonable basis suitability standard can be found here, here, and here.


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Topics: reasonable basis suitability, FINRA, SRO, valuation, Investment Program Association, Investment Advisors, investments, REIT, DPP, SEC, Compliance, Thomas M. Selman, regulation.

SEC/Finra Battle for Regulation of RIAs is Heating Up

Posted by Jack Duval

Oct 10, 2012 4:32:34 AM

Melanie Waddell of AdvisorOne reports that SEC Commissioner Daniel Gallagher has been casting rhetorical aspersions on Finra's ability to regulate RIAs.  (AdvisorOne)  Here's a taste:

“Is FINRA becoming a ‘deputy SEC’?” Gallagher, a Republican, asked during a recent speech at a Securities Industry and Financial Markets Association conference. “With all of the issues facing the broker-dealer industry it was created to oversee, should FINRA be seeking to branch out into entirely new fields of responsibility, such as regulating investment advisors?” he asked. “Is ‘mission creep’ affecting FINRA’s ability to perform its core duties?”

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Topics: Daniel M. Gallagher, FINRA, RIA, AdvisorOne, SRO, SEC, Melanie Waddell, regulation.

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