Highlights from the Financial Services Committee’s Hearing on the SRO Bill for Investment Advisers

June 06, 2012

Reading time : 5 minutes

This morning the Committee on Financial Services of the U.S. House of Representatives (“Financial Services Committee”) held a hearing on the Investment Adviser Oversight Act of 2012 (“Investment Adviser Oversight Act”). The Investment Adviser Oversight Act proposes the creation of a self-regulatory organization (“SRO”) for investment advisers. The panel of witnesses for the hearing consisted of representatives from the Financial Services Institute (“FSI”), the National Association of Insurance and Financial Advisors (“NAIFA”), the Securities Industry and Financial Markets Association (“SIFMA”), the Financial Industry Regulatory Authority (“FINRA”), the North American Securities Administrators Association (NASAA), and the Investment Adviser Association (“IAA”).

Representative Bachus (R – AL), Chairman of the Financial Services Committee and co-sponsor of the bill opened the hearing by declaring “The investing public deserves more robust oversight of these professionals to whom they have entrusted their hard-earned money… This bipartisan bill helps close what everyone agrees is a glaring regulatory gap – a gap that puts the average American investor at risk and undermines investor confidence.” Co-sponsor Rep. Carolyn McCarthy (D – NY) said she would actually prefer to use the U.S. Securities and Exchange Commission (“SEC”) but “it’s not going to receive the funding it needs and this is the best option.”

Ranking member of the Financial Services Committee Rep. Barney Frank (D – MA) acknowledged the need to do a better job of regulating. He also expressed his opposition to the bill. “What we need to do is first fully fund the SEC. Give enough resources to the SEC to do its job.”

Dale Brown, President of FSI said FSI endorsed the bill and explained that FINRA is the best choice to be the SRO for investment advisers because FSI members have a good working relationship with FINRA and utilizing the SRO would not burden taxpayers. Brown testified that the Investment Adviser Oversight Act would “greatly enhance investor protection by replacing the current patchwork of regulation with a set of uniform examination and enforcement standards.”

Thomas Currey, former President of NAIFA, testified that NAIFA supports the bill as well. “From NAIFA’s perspective, the Investment Adviser Oversight Act is the most sound and practical approach. Allowing FINRA to serve as the SRO for investment advisers is simple common sense.”

The representative for SIFMA, Chet Helck, testified that “SIFMA’s support for a so-called self-regulatory organization for retail advisers is premised on the recognition that broker-dealers provide some of the same services as investment advisers – including providing personalized investment advice to individual clients. We believe that when broker-dealers and investment advisers provide the same service, they should be held to the same standard.” Later when questioned, Helck said he believes the bill does not go far enough in regulating investment advisers but that it is a good start.

Richard Ketchum of FINRA noted that this idea of an SRO for investment advisers is not new, “in 1963 the SEC proposed an SRO for investment advisers.” Ketchum also testified that those investment advisers who are state-registered and compliant would have extremely low fees as a member of the SRO (assuming that FINRA would be the SRO). He believes the bill fills the gap in the oversight of investment advisers and that FINRA is positioned to fill the role as SRO.

Two panel members that testified in strong opposition of the bill and FINRA as SRO were John Morgan and David Tittsworth.  Morgan testified that NASAA strongly opposes the Investment Adviser Oversight Act and that requiring state-registered investment advisers to join an SRO is unnecessary and burdensome regulation. The bill “embraces a ‘one size fits all’ approach. It will require some federally registered investment advisers and most state registered investment advisers to become members of an SRO, pay membership fees to the SRO, comply with its rules, and be subject to inspection by the SRO—regardless of whether the firm has clients in more than one state or conducts business in a way that has any demonstrable effect on national markets.” The bill “creates regulatory fatigue” and “many investment advisers will simply close their doors” if the SRO bill passes. In response to a question about low member ship fees for state registered investment advisers Morgan responded, “Membership fees are just part of the cost, there are additional fees such as ongoing compliance costs.”

Tittsworth testified on behalf of the IAA that the Investment Adviser Oversight Act “unfairly targets small businesses.”  The IAA believes that “because of exemptions in the bill, smaller advisers are singled out for additional regulation and costs. The substantial costs and bureaucracy of an additional, unnecessary layer of SRO regulation and oversight of advisory firms would have a significant adverse impact on small businesses and job creation.” The IAA advocates continued SEC oversight and assessing user fees on all SEC registered investment advisers. He said outsourcing government oversight to an SRO is not the best method and cited reports from the U.S. Chamber of Commerce, the U.S. Government Accountability Office (“GAO”), and the Boston Consulting Group (“BCG”) that “identified deficiencies in the SRO model.”

Posted by Bryan Hill
Labels: FINRA, SRO