NASAA head bashes SRO idea — in Finra’s den

A state securities regulator, speaking at a conference Tuesday, was not bashful about slamming proposed legislation — even though the host of the conference has come out strongly in favor of the measure.

During a panel on compliance at the annual conference of the Financial Industry Regulatory Authority Inc. in Washington, Jack Herstein, president of the North American Securities Administrators Association, criticized a proposal by House Financial Services Committee Chairman Spencer Bachus, R-Ala., that that would shift investment adviser oversight away from the Securities and Exchange Commission to one or more self-regulatory organizations. Finra has been lobbying for the gig.

“The approach Chairman Bachus has taken is overreaching,” said Mr. Herstein, assistant director of the Nebraska Department of Banking and Finance. “The states have a sovereign obligation to provide oversight. State-registered [investment advisers] should be exempt from the bill.”

Mr. Herstein argued that the measure would usurp state authority over advisers with fewer than $100 million in assets under management. But when he introduced the bill last month, Mr. Bachus said the proposal would increase investor protection, noting that the SEC examined only 8% of the approximately 12,000 register advisers last year, while Finra examined 58% of brokers.

Finra, which would like to expand its reach to advisers, has been lobbying Congress aggressively on behalf of the bill. Finra oversight is anathema to most investment advisers, who contend that the organization lacks expertise in enforcing the fiduciary-duty standard to which advisers must adhere. Brokers meet a less stringent suitability standard.

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While Mr. Herstein argued for exemptions for investment advisers at smaller firms, he criticized the slew of exemptions that are written into the Bachus bill. Those include passes for hedge funds, mutual funds and those who have institutional clients and others. Mr. Herstein cited a favorite example used by Mr. Bachus and other proponents in pushing the bill. They say that an SRO is required to prevent another swindle like the $50 billion Ponzi scheme perpetrated by Bernie Madoff.

“[Under] this bill as drafted, Madoff would not be examined by an SRO,” Mr. Herstein said.

That drew a friendly but quick rejoinder from Richard Ketchum, Finra’s chairman and chief executive, who moderated the compliance panel.

“We wouldn’t come to that conclusion,” Mr. Ketchum said. “But it would be interesting to have a conversation.”

Later in the session, Mr. Ketchum posed a question from an audience member, who asked Mr. Herstein why it wouldn’t be better to add an SRO to the efforts by states to stop the next Madoff.

Mr. Herstein said that in some situations, “two sets of eyes” might be helpful. But for the most part, an SRO would add higher costs and an extra layer of regulation for advisers. The state regulators favor bolstering the SEC budget to increase adviser oversight.

Mr. Ketchum sought to ease any potential tension on the panel by praising what he called the close working relationship between states and Finra. He also said both groups have the same goal when it comes to investor protection.

“We certainly would strongly agree that someone needs new examination resources,” Mr. Ketchum said.