State regulators on adviser SRO: Thanks, but no thanks

SEC commissioner pitches idea at NASAA conference — but attendees balk; ‘you've got to wonder'

Sep 13, 2011 @ 12:50 pm

By Mark Schoeff Jr.

+ Zoom

Securities and Exchange Commissioner Elisse Walter may have picked the wrong place to give a speech lauding the virtues of a self-regulatory organization for investment advisers.

In an address yesterday to the North American Securities Administrators Association Inc. annual conference in Wichita, Kan., Ms. Walter endorsed a draft bill proposed by House Financial Services Committee Chairman Spencer Bachus, R-Ala., that would authorize one or more SROs and essentially require all retail investment advisers to sign up with one. Ms. Walter said an SRO is the best way to strengthen oversight of the investment advice industry

But state securities administrators were wary of the Bachus proposal, which will be the subject of a congressional hearing today. They say that the plan could lead to the Financial Industry Regulatory Authority Inc. or other SROs usurping their role in overseeing smaller advisers.

Shifting oversight for certain advisers from the states to an SRO “would increase costs without substantially enhancing investor protection,” Pennsylvania securities commissioner Steve Irwin said in testimony prepared for today's hearing on Capitol Hill. “This would subject these small businesses to duplicative regulation and add new and unnecessary costs.”

Yesterday in Wichita, however, Ms. Walter said that the SEC is unlikely to receive the funding it needs from Congress to expand its adviser examination program. In a report to Congress earlier this year, the agency acknowledged that it reviews only about 9% of the nearly 12,000 registered advisers.

That study, mandated by the Dodd-Frank financial reform law, recommended three ways to increase oversight — allow the SEC to charge user fees for exams, establish an SRO or enable Finra to oversee investment advisers who are dually registered as broker-dealers. Any of the three would require congressional authorization.

“Opposition to user fees and difficulties of the annual appropriations process make it difficult to foresee a situation in which this Congress would allocate the resources the SEC would need to significantly increase adviser examinations,” Ms. Walter said at the NASAA conference. “Swift and decisive action is critical — not relegating it to another day.”

In an interview after her speech, Ms. Walter said she likes what she's seen of Mr. Bachus' proposal. “The backbone of the bill is really a good one, from an initial look,” she said.

The measure left a much different impression on David Massey, deputy securities administrator in North Carolina.

He said the proposal appears to allow SROs to supersede state oversight advisers. Under Dodd-Frank, state regulators are set to extend their reach by next summer to all advisers with less than $100 million in assets under management. Currently, states oversee those with $25 million or less in AUM.

“The new proposal coming out of this committee would essentially undercut that by taking away the authority that Dodd-Frank gives the states to regulate the under-$100 million [investment advisers] and force it to be shared with an SRO over which the states have no regulatory power,” said Mr. Massey, who just completed a one-year term as NASAA president. “It's kind of complicated. This is a discussion draft right now, but you've got to wonder.”

Finra supports establishing one or more adviser SROs, arguing that it would subject advisers to a greater level of scrutiny comparable to the oversight the self-regulator provides to broker-dealers. In testimony before the House subcommittee, Finra chief executive Richard Ketchum is expected to say that his group is uniquely positioned to be one of the adviser SROs.

An SEC representative declined to comment about the state regulators' concerns about how an SRO would mesh with state regulation.

Mr. Bachus' draft proposal states that nothing in the bill should be “construed to limit or detract from the authority or ability of any state to regulate any investment adviser.” But Ms. Walter agreed that the suggested legislative language leaves room for interpretation about whether the states would be trumped by an SRO.

“That's not really addressed in this bill,” she said. “That's one of those topics that needs to be addressed in one way or the other.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

3 themes shaping your business now

If there are three overriding themes for advisers right now its succession planning, acquisition and hiring millennials. Financial adviser James Loftin discusses how his firm is tackling all three.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.

LPL retains $570 million with super-OSJ deal

Kansas-based nVision Wealth will come under supervision of Chicago-based IHT Wealth Management.

How does your advisory firm stack up?

Comparing a firm's pay to the competition can point out vast flaws.

10 signs your client is cheating on you

Sure signs that clients may be on the way out the door.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print