How the main players are faring in the battle over an SRO

The House Financial Services Committee will continue to work into at least July on legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to one or more self-regulatory organizations – perhaps the Financial Industry Regulatory Authority Inc.

This relative slowdown — most observers had anticipated a committee vote in June after the bill was introduced in late April — puts us at a sort of half-time on the bill. Here’s how some major players are faring:

SRO opponents

Investment advisers charge that an SRO represents a costly new layer of regulation that threatens jobs at small advisory firms. If Finra becomes the SRO, they fear it would try to force its rules-based broker regulations — designed to uphold the suitability standard — on advisers, who must meet the more stringent fiduciary duty when dealing with clients.

They think that they have momentum due to a June 6 hearing that focused in large part on their primary concern — the potential costs of establishing and running an SRO.

James Karabas, managing director of Vestor Capital Partners LLC and president of the Financial Planning Association’s Illinois chapter, met recently with Rep. Bob Dold, R-Ill., a member of the House Financial Services Committee.

“He said he is getting a lot of consistent communication about the bill from our industry,” Mr. Karabas said. Lawmakers “are shifting to understanding how [the SRO bill] would affect the industry in a negative way. It’s taken some time to get our voices heard.”

Participants at a TD Ameritrade Institutional conference this week asserted that a vote on the Bachus bill has been delayed due to lack of support for the measure. It’s not yet clear whether the advisers’ preferred approach to increasing oversight — letting the SEC charge user fees for exams — will gain momentum.

House Financial Services Chairman Spencer Bachus, R-Ala.

Mr. Bachus’ bill responds to an SEC report in January 2011 that stated that the agency only has the resources to review annually about 8% of the then-12,000 registered investment advisers. He asserts that an SRO is needed to increase exam frequency and protect investors from the next Bernard Madoff or R. Allen Stanford.

The June 6 hearing couldn’t have gone as well as Mr. Bachus was hoping. Many lawmakers called his bill a “good start” but few on either side of the aisle embraced it. Mr. Bachus said he was open to making changes, which has contributed to slowing down the measure.

Even though his term as chairman of the committee ends in January, Mr. Bachus will hold the powerful position for the rest of the year. He has not yet actively sought co-sponsors for the SRO bill. But when he does, it will be difficult for his fellow Republicans to resist him.

He is showing no signs of backing down. Although his bill doesn’t explicitly name Finra, he praises the agency for reviewing annually about 58% of the more than 4,000 registered brokerage firms.

“Understandably, [TD Ameritrade] and some others are not enthusiastic about increased oversight,” Jeff Emerson, a spokesman for Mr. Bachus, wrote in an email. “But the status quo, where the average retail investment adviser is examined only once a decade, is unacceptable.”

Finra

Finra covets the adviser-regulator role. For months, the agency kept a low profile, as it worked Capitol Hill to promote the SRO bill. Now that the resistance is growing, it has become more aggressive in answering criticisms.

For instance, Finra chief executive Rick Ketchum tried to bat back cost concerns at the June 6 hearing by saying that more than 1,000 of the firms Finra regulates pay less than $1,000 in fees annually.

Proponents of an SRO also have developed a new spin for countering other frequent Finra criticisms — namely that its operations are opaque and that it is a tool of the financial industry.

The Financial Services Institute and the Securities Industry and Financial Markets Association, who both want Finra to become the adviser SRO, don’t use the term SRO anymore. They call Finra an “independent regulatory organization” because it has a majority-public board.

“Finra’s an independent regulator,” Chet Helck, chief executive of Raymond James Private Client Group and SIFMA chairman-elect, said in an interview following the June 6 hearing. “Members do not control the rulemaking nor the enforcement procedures. It’s governed by an independent board. The industry has people on the board but it’s independent.”

SEC

While the SRO debate swirls, the SEC continues to face funding challenges. The Senate Appropriations Committee approved its request for a $245-million increase in its budget to $1.566 billion. But the House Appropriations Committee is poised to give it only a $50-million increase next week.

The one thing that’s certain is that there will not be a quick resolution to the SRO bill. Even if it passes the committee, it may be difficult to get it on the House calendar. The Senate will likely ignore the measure, but supporters still want to make a strong statement in the House.

“I don’t believe they’re having any trouble at all,” Chris Paulitz, FSI spokesman, said of Mr. Bachus’ efforts. “They’re just taking the time to get this right.”