Long winter of waiting, as SRO legislation pushed back until spring

Bachus bill put on the back burner; still gathering responses from industry

Dec 6, 2011 @ 3:18 pm

By Mark Schoeff Jr.

+ Zoom

Yet another issue that directly affects the investment advice sector has been pushed off until next year in Washington.

Formal legislation aimed at shifting the oversight of investment advisers from the Securities and Exchange Commission to another entity will not be introduced for several months, according to an aide to House Financial Services Committee Chairman Spencer Bachus, R-Ala.

At a mid-September hearing, Mr. Bachus released a draft bill that would authorize one or more self-regulatory organizations for investment advisers. It was widely thought that a formal measure would emerge before the end of the year.

That schedule has slipped.

Now legislation will “probably not be introduced until next spring,” Jeff Emerson, deputy chief of staff for communications on the Financial Services Committee, wrote in an e-mail. “The timing of a markup has not been determined yet.”

Mr. Bachus made his proposal in response to an SEC study in January that said that the agency lacked the resources to adequately examine the nearly 12,000 registered advisers, and recommended a self-regulatory organization as one option for Congress to consider.

At the hearing, investment adviser organizations objected to the idea of an SRO, especially if the job falls to the Financial Industry Regulatory Authority Inc., the SRO for broker-dealers. Advisers are wary of Finra because they contend that it lacks the expertise to enforce the fiduciary-duty standard to which advisers must adhere.

The House financial panel also heard concerns from state securities regulators, who worry that an SRO would usurp their authority.

But Finra argued that it has the resources to audit advisers much more frequently than the SEC, which examines about 8% of the firms in its purview annually. Finra has said that it would set up a separate governance structure for advisers that would be sensitive to the sector's characteristics.

Mr. Emerson said that his boss is weighing the feedback he is receiving, and likely will modify the draft legislation before turning it into a formal bill.

“There will be differences based on responses we have had to the discussion draft,” Mr. Emerson wrote. “We are still in the process of gathering those responses.”

One SRO opponent welcomes the delay in the legislative process.

“We had expected to see another draft before the end of the year,” said David Tittsworth, executive director of the Investment Adviser Association. “Anything that keeps the bill from moving is relatively good news.”

One of the leading advocates for an SRO — and for Finra to assume the role — is not worried about the delay.

“We are never surprised by delays in the legislative process, as they are inevitable,” Dale Brown, president and chief executive of the Financial Services Institute Inc., said in a statement. “Momentum is not only still in favor of Chairman Bachus' SRO bill, but it's growing, because it is the only viable solution to a growing problem.”

State regulators are pleased that they'll have more time to make their case to Mr. Bachus about what they see as flaws in his approach.

The measured pace contrasts with another bill that state regulators oppose that would allow startup companies to raise capital online through so-called crowd funding. The House passed that measure with more than 400 votes shortly after its introduction in November. The Senate already has held a hearing on the proposal.

“Pushing a possible investment adviser SRO bill into next session would give the full committee an opportunity to take advantage of additional time to carefully assess the need for an investment adviser SRO without rushing to judgment as it did with crowd-funding legislation,” Bob Webster, spokesman for the North American Security Administrators Association, wrote in an e-mail.

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