When the House Financial Services Committee holds a hearing next week on legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to an industry organization, opponents of the bill are going to try to hit the Republican sweet spot by arguing that the measure will hurt small advisory firms. And they have data to back up their contention.
A poll released by the Massachusetts Securities Division on Thursday shows that most Bay State investment advisers oppose an SRO because they believe it will foist exorbitant new regulatory costs on them.
The Massachusetts securities office said in a statement that “41% of those who [responded] volunteered comments that the bill as presently drafted was likely to put them out of business.”
More than half of the state's 649 advisers participated in the poll, with 79% of them reporting less than $30 million in assets under management and nearly all of them having fewer than five employees.
“State-registered IAs are independent small business men,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. “Imposing a national self-regulatory organization on them would create a financial burden with no guarantee of better protection for investors.”
The North American Security Administrators Association is scheduled to testify at the SRO bill hearing on June 6. Their witness is certain to mention the Massachusetts poll.
At the same time, the Financial Industry Regulatory Authority Inc., which also will testify and is pushing to become the adviser SRO, probably will point out that under the bill state-regulated advisers won't be examined by the SRO in states where exams are conducted at least every four years. All advisers with retail clients, no matter their size, would have to pay membership fees to the SRO. But those fees would have to be approved by the SEC, which would oversee the adviser SRO.
The dispute over the price of an SRO likely will be highlighted at the hearing. A Boston Consulting Group study, released in December and sponsored by SRO opponents, said that an SRO would cost twice as much as adequately funding the SEC. Finra later released its own estimate that showed much lower costs.
The challenge for the anti-SRO forces is that as they target one GOP totem – small business – they're going up against another Republican touchstone – Wall Street. Wall Street firms exert plenty of influence over Democrats, too.
The champions of the bill are House Financial Services Chairman Spencer Bachus, R-Ala., and the Democrat with whom he introduced the measure in April, Rep. Carolyn McCarthy of New York.
Mr. Bachus argues that he's trying to increase investor protection by turning over adviser examinations to an SRO. He notes that the SEC examines annually only about 8% of the nearly 12,000 registered advisers compared to the 58% of brokers that Finra, the broker SRO, examines every year.
Although Mr. Bachus' bill would authorize one or more SROs, it's clear that he favors Finra for the job.
The idea of being regulated by Finra sends chills down the spines of most advisers. They say that Finra is biased toward brokers, in the pocket of Wall Street and lacks the expertise to administer the fiduciary standard of care advisers must give their clients. Brokers are held to the less stringent suitability standard when recommending investment products.
Finra asserts it is the best candidate to be the adviser SRO. The regulator has tried to reassure advisers by saying that it would create a separate governance structure for them that would be sensitive to the characteristics of their business model.
It is unacceptable, according to Finra, that the SEC examines advisers only about once a decade, with 38% never having been examined.
There is a “critical need to fill an untenable gap in investor protection in the investment adviser space,” Finra said in a statement. “One or more SROs overseen by the SEC is a proven way to augment government resources and to provide the needed oversight.”
A Finra witness will make that case in the June 6 hearing. Finra is one of four witnesses invited to testify by Republicans, according to sources with knowledge of the witness list. The others are the Securities Industry and Financial Markets Association, the Financial Services Institute and the National Association of Insurance and Financial Advisors.
The witnesses invited by Democrats are NASAA and the Investment Adviser Association.
Here's what I'll be watching for next Wedneday:
1. Will there be any chinks in the Republican armor? Will anyone in the GOP express skepticism of the SRO bill in defiance of his or her chairman? It would be unusual for a Republican to break ranks in the highly disciplined House. But if the GOP had been in lockstep on the measure, it might have gone straight to a committee vote rather than be subject to a hearing.
2. How many Democrats besides Ms. McCarthy will come out in favor of the bill? The top two Democrats are already on record opposing it – House Financial Services Committee ranking member Barney Frank, D-Mass., and Rep. Maxine Waters, D-Calif.
3. How many Democrats will express support for authorizing the SEC to charge user fees for exams? An SEC study in January 2011 recommended three ways to increase adviser oversight: allow the agency to charge user fees; create an SRO; or expand Finra's authority to include advisers dually registered as brokers. Each option requires congressional approval.
4. Will SRO opponents be able to convince Republicans that an SEC user fee is not the equivalent of a new tax?
Those questions may not be answered definitively. But it's certain that we'll hear an argument like this one:
“If Chairman Bachus achieves the hostile takeover of small business owners in our industry, he will drive good men and women out of business and harm the consumers they work so hard to serve,” Susan John, national chairman of the National Association of Personal Financial Advisors, said in a statement this week.