In the debate on regulatory reform of the financial services industry, the recent focus has been on the alleged Bernard Madoff scandal. The Madoff case clearly demonstrates an enforcement failure by the Securities and Exchange Commission and the Financial Industry Regulatory Authority that must be thoroughly investigated and fixed. The Madoff case should serve to emphasize a larger issue namely, that Congress and regulators should take action to extend the fiduciary duty of investment advisers to all who give investment advice.
Investment management professionals should work to ensure that the fallout from the Madoff case does not result in legislative or regulatory reforms that do more harm than good.
There are at least three specific areas that could harm investment advisers and the clients they serve: (1) restructuring the SEC in such a way that its essential missions are compromised or diminished; (2) subjecting investment advisers to broker-dealer rules (including substituting a broker's suitability standard for an adviser's fiduciary obligation); and (3) establishing FINRA as the self-regulatory organization for investment advisers.
The investment advisory profession fully supports financial regulatory reform to address the root causes of the economic crisis: bad loans, securitization of mortgage-backed products and leverage. But I'm concerned, along with others in the investment community, that some proposals actually will weaken the current regulatory system.
First, while it is clear that any shortcomings of the SEC in the economic crisis must be addressed, we believe the SEC's missions of protecting investors, maintaining fair and orderly markets, and facilitating capital formation must be preserved and adequately funded. Second, instead of subjecting investment advisers to inappropriate broker-dealer rules, any "harmonization" of such laws and regulations should extend the investor protection benefits of investment adviser fiduciary standards to anyone who offers investment advice. Third, establishing FINRA as a self-regulatory organization for advisers is unnecessary, burdensome and costly, and would subject investment advisers to an industry-funded organization that is governed by the brokerage industry and its non-fiduciary sales culture.
Recent congressional hearings examining the Madoff case reveal that all these issues are on the table. For example, FINRA's interim CEO, Stephen Luparello, stated at a recent Senate Banking Committee hearing: "The absence of FINRA-type oversight of the investment adviser industry leaves their customers without an important layer of protection inherent in a vigorous examination and enforcement program and the imposition of specific rules and requirements. It simply makes no sense to deprive investment adviser customers of the same level of oversight that broker-dealer customers receive."