By Suzanne Barlyn
NEW YORK, Feb 6 (Reuters) - Wall Street's industry-funded
watchdog is pulling back from a campaign to expand its powers so
that it would oversee 11,000 registered investment advisers,
leaving a regulatory hole that could be exploited by those
intending to commit fraud, its head warned on Wednesday.
Financial Industry Regulatory Authority (FINRA) Chairman and
CEO Richard Ketchum said there was no sign it can convince
lawmakers in Washington to support a change in the way the
advisers are regulated anytime soon.
In particular it does not expect the U.S. House of
Representatives Financial Services Committee to revisit the
topic in the immediate future, given leadership changes
following the 2012 elections, and that has led FINRA to change
its strategy, he said.
"I'm not a big believer in beating a head against the
wall," Ketchum said in an interview. "We'll focus on things we
FINRA, which oversees the U.S. brokerage industry, has spent
about $4.9 million on lobbying since 2008, according to the
Center for Responsive Politics, a Washington-based research
group. Much of that has been directed at the adviser regulation
Currently, registered investment advisers are regulated by
the U.S. Securities and Exchange Commission but a lack of
resources means it can only get around to examining each
adviser's books about once every 11 years on average.
A 2009 report by a special committee commissioned by FINRA
reported that its lack of authority over investment advisers
contributed to its failure to uncover Bernard Madoff's
multi-billion-dollar fraud. FINRA's authority extended to the
brokerage arm of Madoff's business while the SEC oversaw
Madoff's investment advisory business. They both missed numerous
One of the problems in getting progress in Washington is
that FINRA has been unable to get unequivocal support from the
SEC for its stance. Ketchum said that if it could get clear and
enthusiastic backing from the SEC, then FINRA would become more
aggressive about the question again.
Investors, in the meantime, remain vulnerable to advisers
who are not examined regularly, he said. FINRA examines the
4,275 firms it currently regulates once every two years on
There is wide agreement that investment advisers need to be
examined more often than they are now. But there's little
agreement about how to get there. And now that key Congressional
committees that could extend FINRA's role are led by lawmakers
who have other priorities - such as housing policy - the issue
is on the backburner.
"The problem and exposure for investors is exactly the same
as it was before," Ketchum said. While other changes in
regulation of the securities industry following Bernard Madoff's
Ponzi scheme will make it more difficult to conduct scams of
that size in the future, fraud is still a problem, he said.
Inadequate policing of investment advisers enhance that
threat, he said. "When you don't go in and examine an entity on
a regular basis, the potential for a Ponzi scheme is much
greater," Ketchum said.
A lack of manpower and financial resources at the SEC are at
the root of the problem, Ketchum said.
The Dodd Frank financial reform law shifted oversight
responsibilities for 2,300 mid-sized investment advisers from
the SEC to state regulators, but that did little to ease the
SEC's workload, Ketchum said.
That is because the law also directed hedge fund and private
equity fund advisers to register with the SEC - a requirement
that added 1,500 private fund advisers to the SEC's
responsibilities, according to figures from the SEC last
October. Another 2,500 private fund advisers were registered
with the agency before Dodd Frank.
It is often far more complex for the SEC to monitor hedge
fund advisers than the mid-sized advisers previously under its
control, Ketchum said.
Most investment advisers are vehemently opposed to FINRA
regulation and prefer to remain under the SEC's watch. They are
skeptical that FINRA will back off the issue of self-regulation
The Investment Adviser Association, a Washington-based trade
group, will "remain vigilant" about monitoring FINRA's moves,
said executive director David Tittsworth.
He pointed to a November speech in which Thomas Selman,
FINRA executive vice president of regulatory policy, suggested
that investment advisers should warm to the idea.
"I think Rick Ketchum is a very sensible fellow," Tittsworth
said. "He understands that you just can't keep going back to
Congress time and time again, unless you're making some
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