Appointment Of Elisse Walter As SEC Chair-Designate Makes FINRA More Likely To Be Named Self-Regulatory Organization Overseeing RIAs Hot

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 “I believe that the SRO model has, in fact, benefitted regulation of the securities industry for more than seven decades,” Walter wrote in a public statement made in her role as an SEC commissioner two years ago.
 

 
That quote is one of many quotable nuggets released by Walter in a seething response to an SEC study released in January 2011 in which Walter revealed in detail her opinion on naming an SRO to regulate RIAs. In the study she commented on, the SEC staff recommended the SEC continue to be responsible for examining RIAs and that its effort be financed by user fees paid by RIAs.
 
Walter responded with a searing attack on the SEC staff’s recommendation.
 
“I would have strongly preferred that the study make more precise and objective recommendations,” Walter wrote in her eight-page public statement sharply critical of the staff position.
 
Walter was named by President Obama as chairman designate yesterday, just as current SEC Chair Mary Schapiro announced she was leaving her position on December 14. Naming Walter chairman-designate was a deliberate move by Obama. It allows Walter to remain chair through 2013 without going through Congressional confirmation hearings, which could become a politicized process given the Republican majority in the Senate.
 
Walter is a veteran regulator whose career has paralleled Schapiro’s. Before becoming an SEC commissioner in July 2008, Walter worked at the Financial Industry Regulatory Authority, the SRO for brokerage firms that Schapiro headed. Before that, Walter was general counsel at the Commodity Futures Trading Commission, where she overlapped with Schapiro’s tenure. Walter’s voting record at the SEC has been almost identical to Schapiro’s.
 
One big difference between Schapiro and Walter, however, is that Schapiro recused herself from the SEC’s deliberations and decisions on whether to make FINRA the SRO for RIAs, citing her former position running FINRA.  Walter has no reservations about her position on RIA regulation, and her public statement as an SEC commissioner in response to the staff’s January 2011 recommendation demonstrated her willingness to advocate for an SRO and against continued direct oversight by the SEC of RIAs .
 
“I believe that the Commission is not, and, unless significant changes are made, cannot fulfill its examination mandate with respect to investment advisers,” Walter said in her statement supporting an SRO solution for regulation of RIAs. “That is the case even though the Dodd-Frank Act decreased substantially the number of investment advisers subject to the agency’s jurisdiction. And, that would be the case even if the Commission had the resources to double its examination frequency percentage, returning to the 2004 frequency level of 18%. Eighteen percent coverage annually is better than 9%, but still insufficient."
 
Walter’s statement cited statistics in the SEC staff report showing that FINRA examined 57% of its members in 2008, and 54% of them in 2009, and that the National Futures Association, the SRO for the futures industry, examined 33% and 30% of its members in 2008 and 2009, respectively.
 
“Thus, OCIE’s (Office of Compliance Inspections and Examinations) current examination rate for investment advisers (9%)—which it estimates could drop as low as 7% in 2011 if additional examiners are not added—would have to increase by nearly five times to reach the average SRO examination rate for these years (43.5%), and more than six times to reach the average rate at FINRA (55.5%),” Walter said in her statement. “To increase the frequency to FINRA’s average, OCIE would need to add more than 2,000 examiners to its advisory program, bringing the total to about 2,500. To provide context for those numbers, OCIE currently has about 850 full-time employees covering all of its programs, and the Commission overall has about 4,000 full-time employees. It is an understatement to say that these increases would be difficult to achieve.”
 
Walter’s strong support does not absolutely, postively seal the regulatory fate of RIAs dreading FINRA being named as their SRO. Her appointment to the chairmanship leaves a vacancy on the Commission, which is now comprised of two Democrats and two Republicans. Walter is a Democrat and has replaced Schapiro who was an independent. Obama is expected to nominate a new commissioner fairly soon to reduce the likelihood of deadlocked votes by the Commission.
 
It is still possible that Consumer Federation of America, Investment Advisers Association and  Financial Planning Coalition – a coalition representing the Financial Planning Association, National Association of Personal Financial Advisors and CFP Board of Standards — can succeed in its effort to allow the SEC to continue to conduct direct oversight of RIAs.  However, with the incoming chairman of the SEC such a strong proponent for the SRO option, the odds of FINRA being named the regulator of RIAs are undoubtedly much higher than they were before her appointment.  

 

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