Bachus Shuts Down SRO Bill for Investment Advisers

August 02, 2012

Last week, U.S. House Financial Services Committee Chairman Spencer Bachus (R – AL), decided to at least temporarily put the Investment Adviser Oversight Act of 2012 (“Investment Adviser Oversight Act”) on hold. This decision came on the heels of Representative Maxine Waters’ (D – CA) introduction of the Investment Adviser Examination Improvement Act of 2012 (“Investment Adviser Examination Improvement Act”).

The purpose of the Investment Adviser Oversight Act is to create a self-regulatory organization (SRO) for investment advisers to close the gap in examinations. Many investment advisers and associated organizations such as the North American Securities Administrators Association (NASAA), the Investment Adviser Association (“IAA”) and the Project On Government Oversight (“POGO”) have opposed the Investment Adviser Oversight Act’s creation of an SRO because they feel it creates an unnecessary layer of regulation and will run many smaller investment advisers out of business. Others, including the Financial Services Institute (FSI), supported the Investment Adviser Oversight Act because they felt that this was the best answer to the U.S. Securities and Exchange Commission’s (“SEC”) inability to examine investment advisers more frequently. The most likely SRO for investment advisers if the bill passes would be the Financial Industry Regulatory Authority (“FINRA”), the current SRO for broker/dealers. If the bill passes and FINRA does become the SRO for investment advisers, then the SEC would oversee FINRA in its role as SRO for investment advisers like it currently does for FINRA’s regulation of broker/dealers.

Bachus decided to put the Investment Adviser Oversight Act on hold until the U.S. House Financial Services Committee can come up with an answer that meets a consensus. Although his bill had bipartisan support, many Democrats, including Rep. Waters and Rep. Barney Frank (D – MA), both of whom are a part of the Financial Services Committee, opposed the bill.

Rep. Waters’ answer to the examination problem is to allow the SEC to charge fees to examine investment advisers. According to her website, “the Investment Adviser Examination Improvement Act provides the Securities and Exchange Commission (SEC) with the authority to impose and collect user fees on investment advisors for the purpose of increasing the number and frequency of SEC examinations.” Many of the same opponents of Bachus’ bill have given their support to the Investment Adviser Examination Improvement Act. NASAA President Jack Herstein wrote a letter in support of the bill. “NASAA has consistently taken the position that investment adviser regulation is, and should remain, a governmental responsibility where oversight is both transparent and accountable. Unlike a private, third-party organization that does not have the expertise or experience with investment adviser regulation and that is accountable to a board ofdirectors and not the investing public, government regulators bring to the table decades ofexperience unmatched by any entity in existence.”

But the Investment Adviser Examination Improvement Act has its detractors. Many Republicans within Congress feel that even with additional resources, the SEC cannot efficiently increase the number of examinations done on investment advisers. That may be why the Republican-led U.S. House Appropriations Committee only increased the SEC’s appropriations by $50 million when the SEC had asked for an additional $245 million.

RIA Compliance Consultants will keep you up to date on any action involving these important pieces of legislation.

Posted by Bryan Hill
Labels: FINRA, NASAA, SEC, SRO