Bachus bill backs SRO for RIAs — and it could be Finra

Measure would establish at least one self-regulatory organization for industry; language trumpets Finra's audit record

Apr 25, 2012 @ 2:16 pm

By Mark Schoeff Jr.

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((Photo: Lobstar28))

House Financial Services Committee Chairman Spencer Bachus, R-Ala., formally introduced a bill on Wednesday that would shift the oversight of investment advisers from the Securities and Exchange Commission to a separate agency – perhaps the Financial Industry Regulatory Authority Inc.

The bill would authorize the creation of one or more self-regulatory organizations, called National Investment Adviser Associations, that would report to the SEC. All advisers with retail clients would have to belong to one of the associations and pay membership dues.

The specter of an SRO has alarmed investment advisers ever since the passage of the Dodd-Frank Act, which mandated that the SEC study how to tighten oversight over the RIA side of the industry. Advisers fear an SRO would be more costly and intrusive than the SEC and would lack the expertise to enforce the fiduciary-duty standard under which they operate. They're especially wary of Finra's becoming the adviser SRO.

For its own part, Finra, the SRO for broker-dealers, has lobbying lawmakers in favor of SRO legislation and has indicated that it's well-positioned to take on adviser oversight.

The issue of adviser oversight has been simmering since the financial crisis and the frauds perpetrated by Bernard Madoff and Allen Stanford. A 2011 study mandated by the Dodd-Frank Act showed the SEC lacks the resources to adequately examine the nearly 12,000 registered advisers in the U.S. “The average SEC-registered investment adviser can expect to be examined less than once every 11 years," Mr. Bachus said in the statement from the Financial Services Committee.

The statement also noted that investment advisers and broker-dealers often provide indistinguishable services to retail customers, but that "only 8 percent of investment advisers were examined by the SEC in 2011, compared to 58 percent of broker-dealers."

The citation lauding Finra's audit record could be a sign that the committee will back the self-regulator's bid to take on oversight of investment advisers.

“Customers may not understand the different titles that investment professionals use, but they do believe that ‘someone' is looking out for them and their investments. For broker-dealers, that is true, but for investment advisers, it is all too often not true — and that must change,” Mr. Bachus said in the statement.

The chairman's bill is largely the same as draft legislation he introduced last fall. The changes he is proposing arise from the January 2011 SEC study, which recommended three ways for Congress to strengthen adviser oversight – create an SRO, allow the SEC to charge user fees for exams or extend Finra's authority to include investment advisers who are dually registered as brokers. Each of the options would require legislation.

Mr. Bachus, who is stepping down as chairman of the House financial committee at the end of the year, does not have a timetable for a panel vote.

“I just don't know yet; but it's a priority,” Mr. Bachus said in a brief interview with InvestmentNews after a hearing Wednesday that featured SEC Chairman Mary Schapiro.

Senate Banking Committee Chairman Tim Johnson, D-S.D., is not enthusiastic about the measure and is unlikely to move it through his panel this year.

During the House session, Mr. Bachus said his measure, which was introduced with Democratic Rep. Carolyn McCarthy of New York, would increase investor protection by putting advisers under closer scrutiny than the SEC can provide.

“This lack of oversight, particularly in the aftermath of the [Bernard] Madoff scandal is perilous and risky,” Mr. Bachus said. His bill “will dramatically increase the examination rate for investment advisers with retail clients.”

Over the course of a nearly three-hour session with lawmakers, Ms. Schapiro addressed the SRO issue. She did not directly endorse Mr. Bachus' bill. But she spoke favorably about the role of SROs, noting that they bolster SEC oversight at a time when the commission lacks the funding to meet all of its regulatory obligations.

“The ability to leverage a SRO organization is really critical,” Ms. Schapiro told lawmakers. “Look at our numbers. We examine about 8% to 9% of investment advisers every year.”

Ms. Schapiro noted that she has stayed at arm's length from the SRO issue because she is a former Finra chief executive. She recused herself from the 2011 report.

The organization she used to lead is pleased with Mr. Bachus' legislation.

“The bill recognizes the need for regular exams of investment advisers, while rightly focusing on retail accounts,” Finra said in a statement. “As Finra has said, the current level of IA exams is unacceptable, and SROs can help fill this untenable gap in the protection of advisory clients.”

The Financial Planning Coalition – which includes the Financial Planning Association, the Certified Financial Planner Board of Standards Inc. and the National Association of Personal Financial Advisors – criticized the Bachus bill, arguing that a SRO would be twice as expensive as funding the SEC properly.

“Creating an SRO for investment advisers would unnecessarily burden small business owners with additional costs,” the organization said in a statement. “Investment advisers are overwhelmingly opposed to a Finra SRO. More than 80% of advisers surveyed said they would prefer continued SEC oversight to being regulated by Finra.”

But an organization representing broker-dealers said that the absence of SEC oversight gives advisers a leg up in the marketplace.

“From a business standpoint, retail investment advisers have an unfair advantage over independent broker-dealers, who are examined by Finra every two years,” Dale Brown, chief executive of the Financial Services Institute, said in a statement. “It's time to protect investors and level the playing field.”

Republicans, and at least one Democrat on the House Financial Services Committee, are ready to start the legislative process in the direction Mr. Brown wants to go.

“We will get on that,” Rep. Steve Stivers, R-Ohio, said in response to Ms. Schapiro when she reminded him that Congress would have to authorize an SRO.


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