A number of securities industry trade associations, which include broker-dealers and other custodians as members, are coming out in favor of a Self-Regulatory Organization (SRO) for registered investment advisors (RIAs) that serve individual investors. Schwab disagrees with an SRO approach. This short position paper explains why. We will continue to work closely with the Investment Adviser Association, our clients and others for a thoughtful resolution of this important issue.

As part of the financial services regulatory reform process under the Dodd-Frank Act, the U.S. Securities and Exchange Commission (SEC) will soon publish its findings and recommendations in two important studies. The first, under Section 913 of Dodd-Frank, analyzes the standard of care that applies today and should apply in the future to investment advice provided by RIAs and broker-dealers. The second, under Section 914 of Dodd-Frank, analyzes whether an SRO for RIAs is needed to augment the SEC's examination and enforcement authorities. At Schwab, we have a strong point of view on both issues based on our long history of serving millions of individual investors both directly and through independent RIAs.

Schwab supports having the same best-interest fiduciary standard for broker-dealers and RIAs any time personalized advice is given, and we believe this standard should be explicitly required by law. That does not mean, however, that broker-dealers and investment advisors are the same or should be regulated the same, including when it comes to the SRO model.

As the largest custodian for independent RIAs, we believe there is great value in an advisor examination program that is robust and fully funded. But an SRO for advisors is not the right way to achieve this goal. Principles-based regulation, as opposed to rules-based regulation which is characteristic of an SRO, has worked for over 70 years under the Investment Advisers Act of 1940, vesting the SEC with the necessary authority to oversee mid- to large-size advisors while granting the states the ability to regulate smaller advisors.

Although the SRO model was historically necessary to permit broker-dealers to enforce high ethical standards on each other, the fiduciary duty applicable to advisers already incorporates such standards and obviates the need for an SRO. That was true in 1940 and is still true today. The broker-dealer SRO model was further premised on broker-dealers' direct participation in the capital-raising process and having both agent and principal access to the markets as members of exchanges (the first SROs) or over-the-counter trading with each other. The prescriptive nature of rules-based regulation may be appropriate in that environment due to the multiple hats that broker-dealers can wear in a complex business. Most RIAs, in contrast, are small business owners who have a very different and more circumscribed business purpose: providing fiduciary investment advice to their clients, a business model ideally suited to principles-based regulation.

Congress and the SEC have identified a gap in resources necessary to perform more regular examinations of advisors. The Dodd-Frank Act helps close that gap by shifting smaller advisors to state oversight. That, coupled with a better funding mechanism for the SEC advisor examination program, would be a much more direct way to address that gap and ensure investor protection without forcing the investment advisor industry into a likely more costly system of regulation.

Schwab will be hosting an upcoming webcast on this and related topics in February for its clients.

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