SEC or Finra? No contest which one advisers chose, <i>IN</i> survey shows

A majority of investment advisers want to see the Securities and Exchange Commission charge user fees for adviser examinations, and reject the idea of adviser oversight by a self-regulatory organization or a more expansive Finra, according to an InvestmentNews poll.
The support for user fees — 58.7%, versus 41.3% who don’t support the fees, among 293 advisers who responded to a survey conducted this week — is a sharp increase from a year ago, when just 27.8% of 335 advisers backed the user fee approach.
Over the past year, support for an SRO has plummeted. In last week’s survey, just 31.4% of advisers said that they back an SRO, down from 51.5% last year.
On a third question, 74.7% of advisers said that they oppose extending the Financial Industry Regulatory Authority Inc.’s reach to include advisers dually registered as brokers. Finra is the broker-dealer SRO.
Last year, 57.7% of advisers said that they opposed Finra’s overseeing dually registered advisers.
The poll questions track the three options for increased investment adviser oversight laid out in a 2011 SEC report to Congress.
The SEC has said that it has the resources to examine annually about 8% of the then-12,000 registered advisers and the study recommended three ways to boost examination coverage: allow the SEC to charge user fees, establish an SRO, or broaden Finra’s mandate. Each option requires congressional approval.
Supporting user fees puts advisers in opposition to legislation proposed by House Financial Services Committee Chairman Spencer Bachus, R-Ala., that would authorize one or more adviser SROs, shifting direct oversight from the SEC.
Advisers are wary of an SRO, saying that it would be a costly new layer of regulation that could threaten jobs at smaller advisory firms. They are particularly opposed to Finra becoming the adviser SRO.

‘EXPERTISE WITH EXAMS’

“If I need to pay user fees, I would rather pay them to the SEC than to Finra or a new SRO,” said Erin Baehr, president of Baehr Family Financial LLC.
“That would be a better approach because the SEC already has expertise with exams,” she said. “They just don’t have the manpower to do enough.”
Another adviser echoed Ms. Baehr’s support.
“I could probably support a user fee, if it goes to the SEC and increases their resources,” said James Karabas, managing director of Vestor Capital Partners LLC and president of the Financial Planning Association’s Illinois chapter. “They already have the expertise because they’ve been doing [exams] so long.”
Mr. Bachus introduced his bill in April as a way, he said, to strengthen investor protection by increasing the number of adviser examinations.
He said that more frequent reviews would help stop investor rip-offs such as the multibillion-dollar Ponzi schemes perpetrated by Bernard Madoff and R. Allen Stanford, who was sentenced to 110 years in federal prison last week.
Although his bill doesn’t explicitly mention Finra, Mr. Bachus has spoken favorably of the organization, praising its record of reviewing annually about 58% of the 4,008 registered brokerage firms.
The results of the InvestmentNews poll suggest that advisers would embrace a bill being drafted by Rep. Maxine Waters, D-Calif., that would authorize the SEC to charge user fees to fund examinations.
InvestmentNews last week obtained a copy of her bill, which will be introduced in the next week or two. Under the measure, all advisers registered with the SEC would have to pay the user fee.
The SEC projects that it will have about 10,000 registered advisers as of early next month, when those with less than $100 million in assets under management will be transferred officially to state oversight.
The Waters bill would require the SEC to collect an aggregate amount of fees allowing the commission to exceed the number of investment adviser examinations that were conducted in fiscal 2011. The SEC would determine fees for individual advisers, taking into account such factors as a firm’s size, the number and types of clients, and their risk profiles.
The SEC, on its own, will be hard-pressed to scratch out a funding increase on Capitol Hill.
Last week, the Democratic-led Senate Appropriations Committee approved a bill that would provide the agency’s entire request of $245 million for fiscal year 2013, boosting the agency’s budget to $1.566 billion.
In the GOP-controlled House, however, the Appropriations Committee is poised to approve a bill this week that would only give the SEC a $50 million budget hike. It is unclear how the differing funding levels would be resolved, but Republicans will likely try to limit the SEC budget.

POTENTIAL COSTS

Mr. Bachus maintains that even if the SEC got its entire funding request, it would still only be able to examine one in 10 investment advisers.
SEC spokesman John Nester declined to comment about an SRO.
“Until the SEC improves its track record with the funds it already receives from investors and issuers, more money is not the best answer,” Jeff Emerson, a spokesman for Mr. Bachus, wrote in an e-mail.
Opponents of Mr. Bachus’ bill were able to focus much of a June 6 hearing on the potential costs imposed by an SRO. Few lawmakers came out in favor of the measure, though many called it a “good start” to improving adviser oversight.
A committee vote on the Bachus bill had been expected this month but has been delayed.
And although there is little enthusiasm for the bill in the Senate, its progress in the House will set a precedent for future SRO legislation. The lobbying will continue to be fierce.
Advisers making the rounds on Capitol Hill support Mr. Bachus’ bill.
Helen Whitson, senior vice president at the Bank of Tennessee and a financial adviser for LPL Financial LLC, participated in a lobbying day for the Financial Services Institute Inc. last month. A dually registered adviser and broker, she promoted the SRO bill in meetings with lawmakers from North Carolina and Tennessee.
“The [registered investment advisers] do not have the oversight that registered representatives do and are not being regularly reviewed,” Ms. Whitson said later.
“If they had oversight, we would all be on the same playing field,” she said. “They’re just not under the same criteria.”

Related Topics: Financial Industry Regulatory Authority, Securities and Exchange Commission