Managers would rather pay SEC than play with Finra

Firms would accept user fees to make agency more robust

Nov 7, 2010 @ 12:01 am

By Doug Halonen

The prospect of Finra regulation for hedge funds and other money managers is scaring them enough that they are offering to open their wallets to help the SEC expand regulation of their industry.

“We would rather pay user fees to the SEC than have Finra as the [self-regulatory organization for money managers],” said David Tittsworth, executive director of the Investment Adviser Association.

“We believe it's important that the SEC have the resources they need to effectively regulate the industry,” said Steve Hinkson, a spokesman for the hedge fund industry's Managed Funds Association.

A key provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act is responsible for managers' fears. The provision requires the SEC to advise Congress by January whether authorization of an self-regulatory organization for money managers “would improve the frequency of examinations of investment advisers.”

Industry speculation makes putting money managers and advisers under the Financial Industry Regulatory Authority Inc., which regulates broker-dealers under oversight of the Securities and Exchange Commission, the most likely scenario. The SEC currently oversees agency-registered money managers and other investment advisers directly.

Money managers oppose Finra regulation for a variety of reasons, including the cost of underwriting a new kind of inspection program.

“We would rather have a governmental regulator,” Mr. Tittsworth said. “The SEC has been dealing with money managers for more than 70 years. They have the expertise and experience to do the job.”

Richard H. Baker, president and chief executive of the Managed Funds Association, wrote in a Sept. 22 comment letter to the SEC that his organization “would support appropriate fees on investment advisers to help ensure that [the SEC] has the resources they need to conduct examinations of the investment adviser industry.” He said hedge fund executives are concerned that creating a new SRO “would not result in any public policy benefit but would create an additional layer of regulation, subjecting advisers to potentially duplicative or inconsistent requirements.”

In an Oct. 19 comment letter, Mr. Tittsworth said: “We oppose extending Finra's jurisdiction to investment advisers due [to] its lack of accountability, lack of transparency, costs, track record and bias favoring the broker-dealer regulatory model.”

In an Oct. 25 comment letter to the SEC, the Investment Company Institute also opposed SRO regulation of money managers. The industry trade group has taken no position on user fees, said ICI spokeswoman Ianthe Zabel.

In the letter, ICI general counsel Karrie McMillan wrote: “In the event the SEC determines to outsource its oversight responsibilities over investment advisers to an SRO, we urge that the SRO have the structure and governance appropriate for adviser regulation. Finra's governing body is not structured for this role. Its expertise is with the suitability standard formerly applicable to broker-dealers, not the higher fiduciary standard followed by investment advisers.”

FINRA SILENT

Finra spokeswoman Nancy Condon said the organization would not comment on the proposals or criticisms by the lobbyists for the SEC-registered money managers. But in a series of public pronouncements, Richard Ketchum, Finra's president and CEO, has hinted that money managers would be a welcome addition to Finra's beat.

“The regulatory regime for investment advisers should be expanded to include an additional component of oversight by an independent regulatory organization,” Mr. Ketchum said in testimony before the Senate Banking Committee in March 2009. “Finra is uniquely positioned from a regulatory standpoint to build an oversight program for investment advisers quickly and efficiently,” he said.

A memorandum on the SEC's website discloses that Mr. Ketchum and other Finra executives met Oct. 8 with SEC officials to discuss the agency study. Ms. Condon and SEC spokesman Kevin Callahan declined to comment on details of the meeting.

Two of the SEC's five commissioners — Chairman Mary Schapiro and Elisse Walter — worked at Finra before joining the agency. Ms. Schapiro was chief executive until joining the SEC in January 2009 and Ms. Walter was a senior executive vice president before joining the SEC in July 2008, according to their official SEC bios.

“Some have asked whether it's appropriate for former Finra executives to be deciding the issue now — whether Finra should be the SRO of investment advisers,” Mr. Tittsworth said.

Under an Obama administration ethics pledge she made when appointed, Ms. Schapiro has recused herself from participating in the study, Mr. Callahan said. Ms. Walter is not required to recuse herself from the study and is planning to participate, Mr. Callahan said.

Doug Halonen is a reporter for sister publication Pensions & Investments.

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