RIA Compliance Blog
House Financial Services Committee Chairman Spencer Bachus (R-AL) has reintroduced his bill calling for a self-regulatory organization (SRO) for investment advisers. The bill has a Democratic co-sponsor, Rep. Carolyn McCarthy (D-NY), indicating that it may have some bipartisan support. Rep. Bachus said that the bill was drafted in response to a Securities and Exchange Commission (SEC) study which showed that the SEC does not have sufficient resources to adequately monitor and regulate the 12,000 registered investment advisers. The SEC examined only 8% of advisers in 2011, which is significantly less than the 58% of broker-dealers that were examined.
The bill calls for the creation of one or more SROs which would be called a “National Investment Adviser Association” (NIAA). NIAA would report to the SEC, and investment advisers with retail customers would be required to become members. The bill provides an exception from the membership requirement for investment advisers with less than $100 million in assets under management. The bill gives individual states the authority to regulate those investment advisers as long as the states conduct periodic on-site examinations.
In support of his bill, Rep. Bachus stated, “The average SEC-registered investment adviser can expect to be examined less than once every 11 years. That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable. Bad actors will naturally flow to the place where they are least likely to be examined. Therefore, it is essential that we augment and supplement the SEC’s oversight to dramatically increase the examination rate for investment advisers with retail customers.” SEC Chairman Mary Schapiro also appears to support the bill. In recent Congressional testimony, she spoke favorably about the role of SROs, noting that they will help with oversight when the SEC does not have the resources to adequately supervise investment advisers. Publically; however, she is staying at arms length from the issue because she is a former Financial Industry Regulatory Authority (FINRA) chief executive.
The bill has also received substantial support from FINRA, which wants to become the new SRO. It released a statement stating the “bipartisan bill…is an important and thoughtful effort to address a serious gap in investor protection. The bill recognizes the need for regular exams of investment advisers, while rightly focusing on retail accounts. As FINRA has said, the current level of IA exams is unacceptable and SROs can help fill this untenable gap in the protection of investment advisory clients.”
The bill has received mixed responses from others. We previously blogged about this in Bill Requiring State Adviser SRO Draws Mixed Response. A number of organizations have strongly opposed the notion of FINRA becoming the SRO for advisers. One group that has become very outspoken is the Investment Advisers Association (IAA), which we previously blogged about in IAA Becomes More Outspoken as SRO Bill Redraft Nears. IAA executive director David Tittsworth has said that FINRA has a conflict of interest and might be biased toward broker-dealers’ interests if it became the SRO. IAA also refers to a study conducted by the Boston Consulting Group (BCG) which concluded that FINRA oversight would cost between $500-$610 million, more than twice as much as it would cost to enhance SEC capabilities for oversight. FINRA contends that these numbers have been “wildly inflated.” The study also showed that more than 80% of advisers would prefer to pay user fees to fund greater SEC oversight than pay membership fees to another SRO. We previously discussed the BCG study in BCG Report Claims FINRA Cost Will Exceed SEC Cost as RIA SRO.
Another outspoken critic of the bill is the Financial Planning Coalition (FPC), which is comprised of the Financial Planning Association, National Association of Personal Financial Advisers and the CFP board. The FPC said, “While we agree with Chairman Bachus and Representative McCarthy that better oversight of investment advisers is needed, we oppose the legislation introduced to the House Financial Service Committee.”
It seems that all parties to this debate agree that more oversight of advisers is needed; however, there is significant disagreement as to which organization should be the regulator. A vote on the bill could occur in the committee as early as next month. The ultimate fate of the bill is uncertain; while a bipartisan bill may more likely make it to the Senate this year. Senate Banking Committee Chairman Tim Johnson (D-SD) has said he is not enthusiastic about the measure and is unlikely to move it through the panel this year.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.