Roundtable: Modernizing SEC and FINRA regulations?
- December 1, 2019: Vol. 6, Number 11

Roundtable: Modernizing SEC and FINRA regulations?

by contributing executives

How should the SEC and FINRA modernize their regulations to better serve the interests of RIAs, broker/dealers, and individuals and family investors?

Clive Slovin, president and CEO, The Strategic Financial Alliance

Too often, advisers find themselves structuring their businesses based not on the needs of their clients or what will deliver the best service experience, but on what makes running their businesses easier from a regulatory perspective. Industry regulators should recognize this. I would like to see an environment where the standards for RIAs and broker/dealers are more consistent and in sync with one another. That would help to streamline a regulatory landscape and simplify the process by which firms and advisers remain in compliance, while allowing the industry to focus on what’s most important — end investors.


Rick Buoncore, managing partner, MAI Capital Management

The average retail investor doesn’t truly understand the importance of working with a “fiduciary,” a professional who is legally and ethically obligated to act only in the best interest of their clients. Brokers, insurance agents and others who are not RIAs, have a far lower level of client responsibility. The regulatory agencies should either mandate the fiduciary standard across all types of “advisers” or better educate investors regarding the differences between a fiduciary and non-fiduciary. True advisers should, of course, always do what is in their clients’ best interest, and thus always be subject to the fiduciary standard.


Dan Kreuter, CEO. Gladstone Group

The vast majority of RIAs want to be compliant and recognize that regulators are fellow citizens trying to protect the investing public. The regulatory agencies should have their examiners better understand the differences between wealth managers and money managers, and mom-and-pop financial advisers versus mega-firms. Currently, they appear to be viewed through the same lens by regulators. There is a tendency to focus on marginal disclosures around marketing and communications, which is a misallocation of resources. Lastly, it would be preferable to have more advanced compliance guidance, rather than making policy through enforcement actions, which sometimes appears to be the case.


Lilian Morvay, founder and CEO, Independent Broker/Dealer Consortium

Both the SEC and FINRA need to consider the impact of its actions on industry members, while supporting market integrity and investor protections. It is critical to simplify and clarify the myriad rules in place to improve consistency and transparency. Such efforts should be guided by a formal process to integrate interpretations and No-Action Letters, while eliminating potentially conflicting staff interpretations and exceptions that were not part of a public comment process. Rules that are outdated and superfluous should be ended. FINRA should continue with its retrospective rule review process and advocate to the SEC when rule changes are warranted.


Larry Roth, managing partner, RLR Strategic Partners
The SEC and FINRA are trying to apply reason and consistency to the oversight of all financial advisers. No one doubts this is worthwhile work. Yet “best interest” is subjective and regulators shouldn’t define it too narrowly in terms of costs. Take alternative investments. Their costs are typically higher than traditional vehicles, but they can serve best interests if a clients’ objectives are diversification and long-term, market-agnostic growth. In the end, regulators shouldn’t limit advisers’ flexibility to recommend products that will help clients achieve their goals. Cost is one factor in evaluating “best interest,” but shouldn’t be the only factor.


Adam Hooper, co-founder and CEO, ReAllocate

Broadening the definition of accredited investor while establishing new checks and balances would be a smart move by the SEC and FINRA that would stimulate investment into real estate, a comparatively safe and stable asset class. This definition is long past due for updating, as net worth and income parameters in the current definition have decreased considerably in value since the definition was last changed in 1982. Whether this broadening comes with a requirement to test into becoming accredited or acknowledge risk awareness, certain safety regulations can and should be implemented to the benefit of RIAs, broker/dealers, individuals and family investors. The SEC’s recent proposed updates to the advertising and solicitation rules of the Investment Advisers Act are a step in the right direction.


Max Sharkansky, managing partner, Trion Properties
Regulation A+’s implementation has fostered an environment for smaller companies, startups and crowdfunding platforms to flourish, while opening up opportunities for a wider range of investors. That said, some managers have still struggled to devise a seamless process for their investors working within its limits, including Tier II’s total equity limit of $50 million for nonaccredited funds. Given the overall benefits of deregulation, a continued loosening — such as an increase in that cap from $100 million to $150 million — will result in an even broader pool of investors, more efficiently raised funds, and improved overall health of the investment community.


Roger Wadsworth, national director, National Due Diligence Alliance

Regulators should modernize rule making by writing and rewriting rules with specific requirements, addressing what is and is not permissible, and stop using words like “reasonable,” “adequate” and “acceptable.” The current system is vague and firms only find out specifics from regulators as they are audited and cited for noncompliance. Specifically, with regard to FINRA, its rules and regulations should be uniformly applied in every district. What might be compliant in one district should not be a violation in another district. Another modernization should be for duly registered representatives that are both RIA- and broker/dealer-registered, they should eliminate the need for a broker/dealer to review and approve products that are sold through the RIA. On a positive note, FINRA has made tremendous headway in revising their exams over the past few years.


Sander Ressler, managing director, Essential Edge Compliance Outsourcing Services

The last decade in the wealth management industry has been spent arguing semantics of terms like “fiduciary duty,” “best interest” and the “suitability standard.” Regulators should focus more on producing plain-English regulations that are comprehensible to ordinary investors and directly address their paramount concern: Being able to trust the person handling their assets. The problem is that the process has been commandeered by lawyers and lobbyists who forget that the rules are meant to benefit investors. The investor perspective gets lost. The more regulators remember who they work for, the better off the industry — and investors — will be.


Bryan Mick, CEO, Mick Law P.C.

The SEC and state regulators should acknowledge that nontraded assets are an important part of an accredited investor's portfolio and should clarify that management fees can be assessed on these investments, given that many RIAs should and do report on performance, reinvest investment cash flows, allocate new investments based upon a dynamic portfolio allocation, track developments at the sponsor and asset level, and manage retitling, redemptions and liquidations. I also believe that rather than tweaking the accredited investor definition based upon nebulous industry knowledge metrics, the net-worth definition should be fixed, then indexed at CPI. Finally, all securities industry regulators should accept the simple premise of behavioral economics and indisputable empirical research on individual investor performance in the public equity and bond markets, and acknowledge that a material level of portfolio illiquidity can be quite beneficial for long-term performance.


Dana Woodbury, founder and chairman, Buttonwood Investment Services

Perhaps the biggest hurdle facing both FINRA and the SEC is keeping up with the technological changes impacting our industry. Of particular note is their treatment of alternative investments and addressing the need of investment advisers to transact business in a paperless society (e.g., with a computerized uniform application). Other technological changes include the custody of all assets in one location. The cooperation of both the industry and legislature, clearer communication will direct the developments our industry awaits to facilitate the needs and convenience of the investor.


John Grady, partner, Practus, LLP

The financial services industry, particularly the broker/dealer segment, needs SEC and FINRA regulation that is process-based and that leaves room for firms to work with clients in ways that match client needs. For broker/dealers, suitability-focused processes lay at the heart of the SEC’s recently adopted Regulation Best Interest; both the SEC and FINRA have made it clear that they want the best interest standard to spur decision-making that furthers customers’ goals, and not simply act as a hindsight-driven trap for the unwary. To make that a reality, both FINRA and the SEC should incent and encourage firms when performing diligence or filling out their product platforms to emphasize how investment products and services should function in client portfolios and to focus on making “positive” choices, and not using their regulations to second-guess the efforts of firms to carefully screen products made available to their clients.

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