More Details of the Investment Adviser SRO Bill

May 12, 2012

Reading time : 3 minutes

As we have been discussing, Rep. Spencer Bachus, the Chairman of the U.S. House Financial Services Committee, recently released the Investment Advisers Oversight Act of 2012, which would create a self-regulatory organization (“SRO”) for investment advisers.  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.

Every investment adviser currently registered with the SEC or a state securities regulator would be required to register with the SRO. Limited exceptions to the membership requirement would be granted to broker/dealers as well as investment advisers who primarily advise mutual funds, foreign clients, and private funds.

While, section (g)(1) states that the bill will not “limit or detract from or otherwise preempt the authority of any State securities commission…to adopt rules, investigate possible violations of state law, initiate enforcement proceedings, or otherwise regulate any investment adviser that is subject to state authority.”  State registered investment advisers would be required to join the SRO.  However, they would not be examined by the SRO if their state securities regulator conducts on-site examinations of all of its registered investment advisers at least every four years.  Nonetheless, the SRO will still have the authority to conduct “for cause” examinations of all members of the SRO.

Additionally, each year, after the conclusion of an “annual conference”, the national SRO would need to submit a report to Congress identifying which state regulators have an examination plan in place and a description of how well the state regulators have been meeting their examination plan.

One interesting provision of the Investment Advisers Oversight Act states that “[n]o investment adviser shall be required to be a member of more than one registered national investment adviser association.”  This means there could potentially be more than one SRO and that investment advisers would have a choice as to which one they register with.  However, the bill also states that any SRO would need to have “capacity.”  This limits the likelihood of the formation of two SROs because “capacity” essentially means adequate funding, and it seems unlikely that two SROs could exist given the projected costs of just a single SRO.

Ultimately, this investment adviser SRO bill seems unlikely to pass this year.  It is not even clear if this bill will make it out of the House Financial Services Committee. While it has bi-partisan support (it is co-sponsored by Rep. Carolyn McCarthy, a Democrat from New York), the ranking Democrat on the committee Rep. Barney Frank opposes the bill.  In the event the bill does make it out of committee it would have to pass the Republican controlled house and would then be sent to the Senate, where it is not likely to go anywhere.  However, if this bill is not passed during this congressional term expect to see a similar version when Congress reconvenes next January.

Posted by Bryan Hill
Labels: SRO, Uncategorized