GOP opposition mounting to fiduciary duty, user fees

Republican resistance to imposing user fees on investment advisers in order to fund examinations — and to a universal fiduciary duty for retail investment advice — is slowly emerging on Capitol Hill.

In a House Financial Services subcommittee hearing March 10, the panel’s GOP majority pressed SEC staff members on both issues. They framed their questions around a recurring GOP theme: What will the cost be to small businesses?

Rep. Judy Biggert, R-Ill., focused on the January SEC staff report that outlined three options for increasing investment adviser oversight.

Mandated by the Dodd-Frank financial regulatory reform law, the staff report recommends three approaches: authorizing the commission to impose user fees on advisers to bolster enforcement efforts; allowing the SEC to designate one or more adviser self-regulatory organizations; or grant the Financial Industry Regulatory Authority Inc. the power to examine investment advisers who are dually registered as broker-dealers.

Each of the options requires congressional authorization. Ms. Biggert wanted to know which would be “least costly to small business.”

Carlo di Florio, director of the SEC Office of Compliance Inspections and Examinations, did not endorse a particular route. He noted that there is support in the investment community for both user fees and an SRO.

“We believe the important objective is to increase the number of examinations done to investment advisers,” said Mr. di Florio, who noted that the SEC examined only 9% of its more than 11,000 registered advisers in fiscal 2010. “Either one of these options is reasonable and can be effective in achieving that objective.”

Republicans demonstrated, however, that they equate fees with taxes – anathema to a party that gained control of the House by promising to slash the federal budget through spending cuts rather than tax increases.

GOP lawmakers pushed back against the argument that the SEC’s budget request for fiscal 2012 – a $300 million boost to $1.407 billion – is fully offset by the fees it collects on securities transactions.

According to staff testimony at the hearing, the SEC desperately needs the funding to implement Dodd-Frank and keep up with an increasingly complex financial market. That market has seen trading volume double over the past decade. Likewise, the number of investment advisers the SEC oversees has grown by more than 50% while their assets have increased to $38 trillion.

Rep. Randy Neugebauer, R-Texas, scoffed at the notion that the SEC pays for itself through the fees it charges. He said the fees themselves “reduce capital in the [financial] system to create jobs.”

“We’re taking money out of the economy,” Mr. Neugebauer said. “While it may be deficit neutral, it is not economic neutral.”

Robert Khuzami, director of the SEC Division of Enforcement, said that the transaction fees are not onerous.

“That’s a good investment in contributing to sound markets and investor confidence,” he said.

At last week’s hearing, Republicans also echoed the dissent voiced by GOP SEC Commissioners Kathleen Casey and Troy Paredes to a commission report on fiduciary duty. That report, mandated by Dodd-Frank, came down on the side of universal standard of care for both brokers and investment advisers.

Although Ms. Casey and Mr. Paredes did not say they opposed such a standard, they did criticize the report, claiming it lacked rigorous economic analysis supporting its conclusion.

“Can you point to any economic research or empirical data or economic analysis that shows the need for this harmonization?” Rep. Edward Royce, R-Calif., asked Robert Cook, director of the SEC Division of Trading and Markets. “And what benefit does the fiduciary standard provide that will not be provided by simply improving disclosures so all parties understand who they are dealing with, and what they can expect from either an investment adviser or broker-dealer?”

In responding to Mr. Royce, as well to as a question from Rep. Steve Stivers, R-Ohio, about whether fiduciary duty would increase consumer costs, Mr. Cook noted that there is not a statutory deadline for the SEC to write a regulation.

“We will have to … tailor the fiduciary duty and harmonization of duties beyond that to different sorts of business models,” Mr. Cook said. “At such a time as the commission does issue a proposed rule, there will be a cost benefit analysis.”