RIA Compliance Blog
The Investment Advisers Association (IAA) believes that it needs to become more outspoken and involved in order to deter Congress from passing legislation requiring a self-regulatory organization (SRO) be designated for registered investment advisers. The IAA is concerned because Congress is fully aware of the Financial Industry Regulatory Authority’s (FINRA) position and its desire to become the SRO for investment advisers. IAA vice president for government relations Neil Simon stated, “Despite our best efforts, there is still a woeful ignorance of the role investment advisers play. They’re aware of FINRA. We need to help educate policymakers so they make informed decisions.”
Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Securities and Exchange Commission (SEC) prepare a report considering whether there should be an SRO for investment advisers, as there is for broker-dealers. The SEC set forth three possible models to help the agency better oversee advisers: (1) allow the SEC to charge user fees for exams, (2) establish a new SRO, or (3) allow FINRA to be the SRO for both registered investment advisers and broker-dealers. The IAA is supporting the user fee approach, while FINRA is aggressively pursuing becoming the designated SRO. House Financial Services Committee Chairman Spencer Bachus (R-Ala) previously offered a bill which would provide for an SRO in response to the SEC’s recommendations, which were delivered to Congress in January 2011. Some industry observers believe that Rep. Bachus is likely to release a revised discussion draft of his bill and push it, because he will leave his post of Financial Services Chairman in January 2013 due to term limits.
Neil Simon suggested that, in order to be heard on Capital Hill, advisers need to become personally involved in reaching out to Congress. He said, “If the message IAA is delivering is going to resonate politically, it is absolutely essential that advisers who live and work in theses locales sit down with their elected representatives and their staffs. I’d love to see 50 or more firms on the Hill, whether they’re members of IAA or not.” The IAA is planning on a “lobbying day” for June 7 in order to discuss the SRO bill with legislators. It plans to promote the findings of the Boston Consulting Group study, which we discussed in BCG Report Claims FINRA Cost Will Exceed SEC Cost as RIA SRO, found in a recent study that it would cost $240-$270 million for the SEC to gain enhanced capabilities to regulate advisers, while there would likely be a $550 – $610 million price tag for FINRA to become the regulator.
IAA executive director David Tittsworth has claimed that FIRNA has a conflict of interest and may be biased towards broker-dealers’ interests if it became the SRO. Critics of FINRA becoming the SRO believe that the SEC is best situated to regulate investment advisers because it already has the experience to enforce the fiduciary duty standard, whereas FINRA is more familiar with the less stringent suitability rule applicable to broker-dealers.
It is uncertain whether the SRO bill will actually be voted on by the House, because it does not appear to be a high priority for lawmakers in this presidential election year. According to AdvisorOne, Rep. Barney Frank (D-Mass), who is the ranking minority member of the Financial Services Committee, has already said that he will vote against the SRO legislation. Also, the Senate Banking Committee has indicated no interest in the bill so far.
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.