Bipartisan support for SRO in question

Apr 29, 2012 @ 12:01 am

By Mark Schoeff Jr.

Proponents of legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to a self-regulatory organization — perhaps the Financial Industry Regulatory Authority Inc. — assert that the bill has bipartisan momentum.

But the top Democrat on the House Financial Services Committee won't sign on, because he questions whether the financial industry should police itself.

“I'm opposed to it,” Rep. Barney Frank, D-Mass., ranking member of the panel, said in an interview Thursday. “This notion of self-regulation is inherently dubious.”

On Wednesday, House Financial Services Committee Chairman Spencer Bachus, R-Ala., and Rep. Carolyn McCarthy, D-N.Y., unveiled a bill authorizing the creation of one or more SROs, called national investment adviser associations, that would report to the SEC. All financial advisers with retail clients would have to belong to one of the associations and pay membership dues.

Republicans are conceding that advisers will have to pay for in-creased examinations, Mr. Frank said.

“The question is: Who should levy the fees?” he said. “Let the SEC do that.”


Mr. Frank's opposition to the measure undercuts what the bill's backers contend is one of its chief political attributes: the bipartisan support reflected in Ms. McCarthy's imprimatur.

“Ms. McCarthy has influence,” said Dale Brown, chief executive of the Financial Services Institute Inc.

“She is a credible voice on the Democratic side of the aisle. I'm encouraged by the position we're in here,” Mr. Brown said.

Mr. Frank doesn't know how many of his Democratic colleagues will join Republicans in backing the bill.

“We're not monolithic,” he said. “People have their own positions.”

The bill likely will get through the committee and may even be approved by the Republican- controlled House. But prospects are dim in the Senate, where the Democratic majority has expressed no interest in the SRO issue.

Proponents of an SRO argue that it would increase adviser examinations by augmenting an underfunded SEC. A statement accompanying the bill's release noted that just 8% of investment advisers were examined by the SEC last year, compared with the 58% of broker-dealers checked by Finra.

Opponents argue that the bill would foist an additional regulatory burden on advisers, increase their costs and make them accountable to an organization that lacks expertise in administering the fiduciary-duty principle to which they adhere.

As the measure heads toward a committee vote, the battle will focus on how much a new SRO would cost.

Finra released a one-and-a-half-page document Wednesday that estimated the startup cost for an SRO at about $15 million, with the annual cost topping out at $155 million.

Those numbers vary sharply from those in a Boston Consulting Group study released in December, which pegged the upper end of an SRO startup at $255 million and the annual cost at $610 million. The BCG evaluation was sponsored by the Investment Adviser Association, TD Ameritrade and the Financial Planning Coalition, which comprises the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors.

The BCG calculations are flawed, Finra contends.

“The BCG [study] was a political document to make their clients happy,” Howard Schloss, Finra executive vice president for corporate communications, said last Thursday.

“The methodology they used was nonsensical,” he said. “The numbers they put out were wildly inflated.”

The Financial Planning Coalition shot back, saying the Finra cost estimate “lacks any analysis, backup assumptions or data” and “uses very different assumptions regarding examiner productivity and cost per examiner than their current, publicly available data shows.”


“Finra's analysis raises concerns about the independence of this oversight infrastructure it says it can put in place, and the ability of the infrastructure to meet the unique needs of investment advisers,” said Marilyn Mohrman-Gillis, the CFP Board's managing director of communications and public policy.

Mr. Schloss insists that Finra's numbers are accurate.

“We understand what it takes to run a national exam program,” he said.

“We have a lot of important pieces in place,” Mr. Schloss said. “You don't have to start from scratch.”

The specter of an SRO — especially if Finra takes on the role — has alarmed investment advisers ever since the passage of the Dodd-Frank Act, which mandated that the SEC study how to tighten oversight of the RIA side of the industry.

The issue of adviser oversight has been simmering since the financial crisis and the frauds perpetrated by Bernard Madoff and Allen Stanford.

A SEC study last year, mandated by Dodd-Frank, recommended three ways to increase adviser examinations: establish an SRO, allow the SEC to charge user fees for exams or extend Finra's reach to include advisers who are dually registered as brokers.

Each option would require congressional authorization. Mr. Bachus' bill is the first step in the process.

“The lack of oversight, particularly in the aftermath of the Madoff scandal, is perilous and risky,” Mr. Bachus said at a committee hearing last Wednesday.

His bill “will dramatically in-crease the examination rate for investment advisers with retail clients,” he said.

Brian Hamburger, managing director of MarketCounsel, a business and regulatory compliance firm, argues that the regulations that it imposes on advisers will reduce the number of brokers who break away from their firms to become registered investment advisers.

“By stemming that tide, we're directly impacting the ability of consumers to seek advice that is largely free from conflicts,” he said.


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