Clark at Large: Reality Check

What's more, it also means that the simplest, and therefore the most likely, solution may in fact turn out to be the best. Let me explain. On May 7 of this year, SEC Commissioner Luis Aguilar gave a speech to the Investment Adviser Association annual conference in San Diego. In it, Commissioner Aguilar surprisingly broke with the SEC party line touted by Chairman Mary Schapiro, who not surprisingly seems to be leaning toward FINRA, which she was instrumental in creating as the former chair and CEO of the NASD.

Instead, Aguilar made an extremely well-reasoned, common-sense proposal that is both so simple and yet so investor-oriented that it just might be able to carry the day. Aguilar argued that when it was passed, the Investment Advisers Act of 1940 rightly exempted brokers from the duties imposed on RIAs because at that time, they were clearly acting as salespeople. But times have changed, and with them, stockbrokers now regularly dispense the very investment advice that would define them as investment advisors under that existing law.

The most direct way to solve this problem and bring securities regulation into the 21st Century, Aguilar contends, would be to redefine brokerage activity such that those brokers who act as investment advisors be regulated as such, including the well-established fiduciary duty to clients, perhaps by simply eliminating the "broker exemption." Those who remain as sales folks would continue under FINRA's supervision.

So far so good. Here's the best part: Commissioner Aguilar went on to point out that rather than look for another regulator for RIAs–FINRA, the CFP Board, or an SRO to be named later, any of which would require massive retooling and staffing–we have an existing regulator with nearly 70 years experience regulating RIAs: the SEC itself. True, this expanded scope (there are currently about 700,000 registered reps, many of whom undoubtedly would be considered investment advisors under this scenario) would require substantial additional resources for the SEC. But as Mr. Aguilar rightly pointed out, allocating more funding to the SEC would be by far the simplest–and probably the least expensive–of any alternatives.

By simply expanding the SEC's responsibilities to cover brokers who are acting like investment advisors, Commissioner Aguilar's proposal certainly meets Fausti's "reality" test. So it's no surprise that fi360 announced its support for his proposal. Despite Schapiro's FINRA connection, expanding the scope of her current agency has to hold considerable appeal.

From the perspective of professional advisors, it's hard to imagine a better outcome: They continue to be regulated by the SEC, under essentially the current standards and client-oriented duties, but with stockbrokers now having to play on the same level field, supervised not by an SRO run by brokerage firms, but by the more independent SEC.

So What's the Downside?

One of the biggest flies in this cure-all salve is the toll that recent events have taken on the SEC's reputation in Washington. Two years ago, the SEC would have been a no-brainer for this assignment. But Bernie Madoff, a series of smaller RIA debacles, and the mortgage-backed meltdown itself have brought the SEC's enforcement capabilities into question. All have been well covered, while Aguilar's speech received little notice in the media. Even worse, the SEC's failings continue to provide fodder for FINRA's relentless lobbying efforts. Call me crazy, but I doubt the B/D organization will go quietly into this good night, especially with its long-coveted RIA prize so close at hand.

According to Fausti, Chairperson Schapiro is acting quickly to address the perceived shortfalls at the SEC, but that may not be enough to head off FINRA. "We need to get the word out about Commissioner Aguilar's proposal," said Fausti, "and tell the consumer-oriented side of the debate."

Consumers, legislators, and the media all need a better understanding of what's at stake in the battle for advisor reregulation. As a country, do we want to water down the fiduciary standard and apply a rules-based, sales-oriented regulation to brokers and RIAs, as suggested by FINRA chair and CEO Richard Ketchum? Or do we want the principles-based, consumer-oriented duties, including the authentic fiduciary standard that currently applies to RIAs, to be expanded to cover everyone who dispenses financial advice to the public?

If people understand the question, the answer is pretty obvious. But to get there, says Fausti, "The SEC is going to need some outside support." Maybe the Financial Planning Coalition, as well as the independent advisory community itself, would do well to throw itself behind that proposal.