Examining the House Financial Services Committee’s Investment Adviser SRO Draft Bill

September 16, 2011

Prior to conducting Tuesday’s hearing on whether to form a self-regulatory organization (“SRO”) for investment advisers, the Chairman of the House Financial Services Committee, Rep. Spencer Bachus posted a draft bill on the Committee’s website.  The draft bill would form a self-regulatory organization for investment advisers under what would be known as the “Investment Adviser Oversight Act of 2011.”

The Investment Advisers Oversight Act would amend the Investment Advisers Act of 1940 to create a “national investment adviser association” which would be overseen by the U.S. Securities and Exchange Commission (“SEC”).  This investment adviser SRO would be given the authority to propose its own rules, subject to SEC approval, and to discipline its members for any violations of current SEC rules.  While the witnesses and Congressmen present at Tuesday’s hearing discussed whether FINRA should serve as the SRO for investment advisers, FINRA is not referenced in this draft bill.

According to the draft bill, investment advisers currently registered with the SEC or a state securities regulator would be required to join the SRO.  Exceptions to the membership requirement would be granted to investment advisers who primarily advise mutual funds, certain charitable organizations and pension funds, foreign clients, private funds, and venture capital funds.  An exception would also be granted to advisers with less than $25 million in assets under management.  However, investment advisers that are registered as broker-dealers or any investment advisers controlled by one or more registered representatives of a broker-dealer could not rely on these exceptions, and thus will be required to join the SRO.

The purpose of creating this self-regulatory organization would be to conduct regulatory examinations more frequently than currently performed by the SEC.  According to the SEC only 9% of SEC registered investment advisers were subject to a regulatory exam versus 40% for broker-dealers.

The SEC has stated that it does not have the funding necessary to conduct more frequent regulatory exams.  However, on Wednesday September 15, during a House Financial Services Committee hearing, Rep. Bachus stated that increasing SEC funding is “necessary as part of the reform process.” Also on Wednesday, the Senate Appropriations Committee approved a 19% increase in the SEC’s budget for 2012.  However, this measure still has to pass the entire Senate as well as the House of Representatives.

If the SEC receives additional funding in 2012, it may be able to conduct more frequent examinations, which could alleviate the need for an investment adviser SRO.  Stay tuned to RIA Compliance Consultants as we will continue to follow this issue.

Posted by Bryan Hill
Labels: SEC, SRO