One potential new SRO is the Self-Regulatory Organization for Independent Investment Advisers, or SROIIA, an Oxford, Mississippi-based organization for independent investment advisors created by the University of Mississippi’s Business Law Society. Mercer Bullard, a long-time mutual fund shareholder rights advocate and a securities law professor at the University of Mississippi Law School, is SROIIA’s advisor.

“It could be the SEC, it could be an SRO or it could be multiple SROs,” says Blain Aikin, CEO of fi360, a company that provides training and practice management around fiduciary education located in Bridgeville, Pennsylvania. “FINRA could get it, but it’s going to take Congressional action to put an SRO in place, and they very well may say it should be more than one SRO.”

In the report, the SEC staff noted that it currently lacks the resources to regulate investment advisors. In addition, many in Congress have stated their reluctance to increase the SEC’s budget in an atmosphere of deficit reduction.

“The SEC essentially punted the question back to Congress and gave them three options, saying, ‘we can do it but we need more resources to do it, or you can have FINRA do it or another SRO do part of it,’” says Keith Hickerson, senior strategy consultant for The American College in Bryn Mawr, Pennsylvania.

Here’s an overview of the various options, and the implications for wealth managers:

The SEC. As the agency created to protect investors, many registered investment advisors who are currently regulated under the fiduciary standard would prefer the SEC to regulate the fiduciary standard as it applies to investment advisors, broker-dealers, financial advisors, insurance agents and others. Many RIA are nervous about being regulated by FINRA, because of the agency’s close connections with broker-dealers, says Hickerson, and would prefer the SEC.

“I think there are a lot of fears about this responsibility falling to FINRA, and a preference for the SEC,” says Michael Kitces, a consultant to financial advisors in Great Falls, Virginia.

“I think the general perception is that a lot of people who have been regulated on the broker-dealer side don’t like how compliance works in that universe and are afraid that FINRA would impose a rules-based approach application of the fiduciary standard. The feeling is that FINRA would take everything it does for the suitability standard and just make it worse. I don’t know that this is necessarily the de facto outcome, though,” he added.

FINRA. FINRA’s advantage is that it already regulates broker-dealers and has the structure in place to potentially expand its mandate to cover the fiduciary standard for broker-dealers and, possibly, investment advisors. FINRA makes rules, carries out audits, enforces regulations and has interactions with thousands of broker-dealers already. It is self-funded by fees, so expanding its mandate wouldn’t cost the government any more money, as would assigning regulation of the fiduciary standard to the SEC.

In a letter to the SEC commenting on the fiduciary standard aspect of Dodd-Frank that Marc Menchel, executive vice president and general counsel of regulation at FINRA, wrote on 25 August 2010, FINRA describes its resources and abilities to enforce a fiduciary standard, which it explicitly endorsed. In presenting FINRA’s comments, Menchel wrote about the advantages FINRA brings to the table in terms of regulation of a fiduciary standard: “Second, we detail the considerable resources FINRA devotes to examination and enforcement of compliance with its rules and the securities laws by broker-dealers and explain how investment advisor oversight would benefit from the added layer of investment protection and resources of a self-regulatory organization. Third, we discuss the advantages of using the highly detailed sales practice prescriptions in broker-dealer regulation to augment a fiduciary standard.”

The Financial Services Institute, a trade group for independent broker-dealers and independent financial advisors, has endorsed FINRA’s bid to become the SRO for enforcing the fiduciary standard.

SROIIA. SROIIA is designed “for the high-standard fiduciary,” notes Aikin.

As SROIIA is formulated, its organizers are exploring various issues, including inspections based on tailored interactions rather than bi-annual standard examinations, an active compliance program designed to assist investment advisors rather than a focus on deficiency notices, and a more effective conflict of interest policy, according to the University of Mississippi Business Law Society.

The Committee for the Fiduciary Standard, a group of RIAs who support a uniform fiduciary standard in line with the current fiduciary standard that RIAs adhere to, has endorsed SROIIA’s bid to become the SRO for a “high” fiduciary standard. Like FINRA, user fees would fund SROIIA’s budget. Should it get the job, SROIIA would need to staff an office, hire examiners, launch a website and take on many other tasks; currently it is a project of law students at the University of Mississippi Law School with limited resources.

Combination of SROs.  In this scenario, there wouldn’t necessarily be a uniform fiduciary standard, or if there were, it would be overseen by two separate SROs. SROIIA may be a preferable alternative to FINRA for independent investment advisors who prefer a higher fiduciary standard, says Aikin. In this situation, FINRA could be designated as the SRO for broker-dealers operating under a lower fiduciary standard.

“Bullard’s theory is that there is going to be some dilution of the fiduciary standard as part of the rule-making process and FINRA would oversee that part of the rules. SROIIA would be the self-regulatory agency for those who want to uphold the what you might call 'authentic' fiduciary standard, or the high fiduciary standard,” says Aikin.