SRO bill dead for now

Bachus says no adviser oversight legislation will move forward without bipartisan suppport; that's not likely

Jul 25, 2012 @ 2:42 pm

By Mark Schoeff Jr.

Hours after legislation was introduced that would maintain the Securities and Exchange Commission's purview over investment advisers, House Financial Services Committee Chairman Spencer Bachus, R-Ala., put his own oversight measure on indefinite hold.

Mr. Bachus has argued that his bill, which would create at least one self-regulatory organization to oversee advisers, would strengthen investor protection by increasing the number of examinations that are performed currently by the SEC.

Adviser groups have stridently opposed Mr. Bachus' bill, saying that it would significantly increase their compliance costs. On Wednesday morning, Rep. Maxine Waters, D-Calif., introduced a bill that would allow the SEC to charge user fees for exams, an approach advisers back.

By Wednesday afternoon, Mr. Bachus said his bill is not going anywhere for the moment.

“Everyone agrees there is a serious problem,” Mr. Bachus said in a statement to InvestmentNews. “Unfortunately, there is no consensus on how to fix it. No bill, including the bipartisan bill I offered, will move forward in the committee unless and until there is a consensus.”

It is not clear how long it will take to reach that consensus, but with the number of legislative days in 2012 quickly dwindling, it may not occur this year.

“From the beginning, I have been willing to listen to and work with anyone who has an idea about how to correct the current lack of examinations,” Mr. Bachus said. “Our only goal should be to deter bad actors and to protect American investors. I see no way to do that without timely examinations. Who conducts those examinations and how is still open for debate, as far as I'm concerned.”

Ms. Waters' measure stipulates that the revenue generated from the user fee would be dedicated to inspections of advisers registered with the SEC. The levy would be calculated based on factors including the frequency of examinations, and the adviser's size and assets under management.

The funding would be available to the SEC only if it conducts exams at a higher rate than it achieved in fiscal 2011. In that 12-month period, the agency reviewed only about 8% of its then nearly 12,000 registered advisers, according to a report it submitted to Congress in January 2011.

The study, mandated by the Dodd-Frank financial reform law, indicated that the SEC lacked the resources to adequately oversee advisers and recommended three ways to increase exams: establish a SRO for advisers; allow the SEC to charge user fees for exams; or extend the reach of the Financial Industry Regulatory Authority Inc., the broker SRO, to include advisers dually registered as brokers.

Each option requires congressional approval. Ms. Waters' bill is an alternative to Mr. Bachus' legislation, which was introduced in April. Mr. Bachus' measure worries advisers because they see it as an opening for Finra to become the adviser SRO.

“My legislation would provide a dedicated funding source to the SEC to enable a robust investment adviser oversight program,” Ms. Waters said in a statement. “I believe this approach provides the simplest, most efficient solution to the problem of inadequate adviser oversight. Also, because the user fees contemplated in my legislation would only be used to fund the regulation of investment advisers, and not to subsidize other functions at the SEC, I think that this option would be more cost effective for the industry.”

Supporters of Mr. Bachus' bill assert that Congress will never provide the SEC the funding necessary to significantly raise its adviser exam rate. They argue that an SRO is required to strengthen investor protection and ensure that advisers are regularly reviewed. Finra is lobbying to become the adviser SRO.

Observers had expected Mr. Bachus' bill to receive a vote in the House Financial Services Committee earlier this summer. The bill stalled after an early-June hearing in which adviser advocates charged that Mr. Bachus' bill would sharply increase advisers' compliance expenses.

David Tittsworth, executive director of the Investment Adviser Association, became the focal point of the June hearing as the most prominent critic of Mr. Bachus' bill. He enthusiastically endorsed Ms. Waters' legislation.

“Investment adviser user fees will be far more effective and efficient in enhancing examinations of advisers than establishing an unnecessary, additional layer of bureaucracy and cost associated with a self-regulatory organization,” Mr. Tittsworth said in a statement. “These enhancements to the SEC's current examination program will not require the expenditure of additional taxpayer dollars.”

The Financial Services Institute is a supporter of Mr. Bachus' bill.

“Increasing the SEC budget to a level that would significantly increase consumer protect tion just isn't political reality,” FSI spokesman Chris Paulitz said in a statement. “Even [SEC] Commissioner [Elisse] Walter said a fully funded SEC wouldn't be able to significantly increase RIA examinations.”

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