Adviser SRO bill to be aired at hearing

Sep 11, 2011 @ 12:01 am

By Mark Schoeff Jr.

A congressional hearing Tuesday will revolve around draft legislation that would establish one or more self-regulatory organizations for investment advisers.

The House Financial Services Capital Markets Subcommittee will delve into the two issues in the Dodd-Frank financial reform law that most directly affect advisers: fiduciary duty and adviser oversight.

The latter will be addressed in part through discussion of a bill drafted by the chairman of the full financial committee, Rep. Spencer Bachus, R-Ala.

His bill doesn't specify a particular SRO for financial advisers but would require retail advisers to be members of such an entity, which would report to the Securities and Exchange Commission.

Advisers to investment companies, private and venture capital funds, and some others, would be exempted.

“It's much like the framework used in creating the SRO for broker-dealers in 1938,” said Duane Thompson, senior policy analyst at Fi360 LP.

That legislation led to the creation of the National Association of Securities Dealers Inc., which is now the Financial Industry Regulatory Authority Inc.

The draft legislation responds to an SEC report this year in which it acknowledged that it examines only about 9% of registered advisers annually due to resource constraints.

The SEC gave Congress three options for increasing oversight: establish an SRO, allow the commission to levy user fees for examinations or extend Finra's reach to include advisers who are dually registered as broker-dealers.

Mr. Bachus said that his bill would increase adviser oversight and help prevent another financial fraud like the one perpetrated by Bernard Madoff, who bilked investors out of $65 billion in his Ponzi scheme.

Although Finra isn't mentioned in the draft legislation, Mr. Bachus promoted the regulator in a Capitol Hill news conference last week.

“Had Finra been on the job, I don't think we would have seen that,” he said in reference to the Madoff scandal. “Instead of an examination every 10 years, as was the case with Madoff, [an adviser SRO] would result in more effective regulation and examinations.”


The bill drew criticism from an organization that wants the SEC to maintain adviser oversight.

“The discussion draft appears to be tailor-made for Finra,” David Tittsworth, executive director of the Investment Adviser Association, wrote in an e-mail last week.

“We oppose Finra's efforts to expand its turf, due to its lack of accountability, its lack of transparency, its poor track record, the costs involved and its bias favoring the broker-dealer model,” wrote Mr. Tittsworth, who will testify at the hearing.

A Finra representative will sit at the witness table with him, making the organization's case that the SEC is unlikely to get the funding required to examine advisers adequately.

“Finra believes that the solution to this problem, given the current budget realities, is to authorize one or more SROs to examine investment advisers,” said Howard Schloss, Finra's executive vice president for corporate communications. “We believe we are well-positioned to fill that role.”

The regulator will assert that it has the ability to enforce the principles-based fiduciary duty that advisers must meet. Currently, Finra ensures that broker-dealers comply with the less stringent suitability standard.

If Finra becomes an adviser SRO, it will hire additional personnel with expertise in the sector.

“We would establish a separate entity with separate governance to oversee adviser work,” Mr. Schloss said. “Just as important, we would conduct examinations and enforce compliance under the Investment Advisers Act [of 1940], not the [19]34 [Securities Exchange] Act.”

In addition to the SRO topic, the House subcommittee will explore another SEC report that recommends that the commission impose a universal fiduciary duty on anyone who provides retail investment advice and harmonize regulations governing investment advisers and broker-dealers.

Under Dodd-Frank, the SEC has the authority to promulgate a fiduciary-duty regulation, which it has said it will do this fall. Republicans, however, have recommended that the SEC do a thorough cost-benefit analysis before proceeding.

Those concerns are likely to be aired again Tuesday.

“The hearing will help give a window into what some of the members are thinking,” said Dan Barry, chief lobbyist for the Financial Planning Association.

In addition to Finra, FSI and IAA, other groups who will testify at the hearing are the Securities Industry and Financial Markets Association, the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, the North American Securities Administrators Association and the Consumer Federation of America.

Advocates on both sides of the debate agree that it is too early to gauge congressional sentiment on an SRO.

“We're trying to educate and inform,” said Dale Brown, president and chief executive of the FSI.

“Our participation in this hearing is part of that effort,” he said. “There is an openness to the idea of an SRO because no one can defend the status quo.”

The draft bill will give the organization and other SRO advocates a rallying point.

“When we have legislation, we will be active in lining up support,” Mr. Brown said.

Email Mark Schoeff at


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