Advisers breathe easier about SRO

Investment advisers can breathe easier — for now — about the prospects of being overseen by a self-regulatory organization.

Hours after legislation was introduced last Wednesday that would maintain the Securities and Exchange Commission's purview over the sector, House Financial Services Committee Chairman Spencer Bachus, R-Ala., suspended indefinitely his measure to shift adviser regulation from the SEC to one or more SROs.

“All of us in the advisory community are relieved that it's being placed on hold,” Keith Newcomb, founder of Full Life Financial LLC, said about the status of Mr. Bachus' bill.

The Investment Adviser Association and other groups opposed Mr. Bachus' legislation, contending that it would foist an expensive new layer of regulation on advisers and sharply raise compliance costs. They prefer to remain under the SEC's aegis and are especially wary of the Financial Industry Regulatory Authority Inc., which oversees broker-dealers.

Finra covets the role of adviser SRO and was the strongest proponent of Mr. Bachus' bill, which he introduced with Rep. Carolyn McCarthy, D-N.Y. Mr. Bachus has maintained that an SRO would have the capacity to conduct significantly more adviser exams than the SEC.

Rep. Maxine Waters, D-Calif., a member of the House Financial Services Committee, introduced a bill last Wednesday that would allow the SEC to expand adviser oversight by charging advisers user fees to fund exams.

“It's exactly what we've been asking for,” said Craig Hester, chairman and chief executive of Hester Capital Management LLC.

“Maybe someone is finally listening to us,” he said. “Our lobbying efforts are starting to pay dividends.”

Mr. Hester joined about 50 other IAA members who met with lawmakers on Capitol Hill on June 7 — the day after a hearing on Mr. Bachus' bill that was dominated by skepticism about the measure.

Both Mr. Bachus' and Ms. Waters' bills came in response to a January 2011 SEC report to Congress — mandated by the Dodd-Frank financial reform law — that indicated that the commission lacked the resources to oversee advisers adequately.

It recommended three options to increase exams: Establish an SRO, allow the SEC to charge user fees, or expand Finra's reach to include advisers who are dually registered as brokers. Each option would require congressional approval.

“SERIOUS PROBLEM’

Most observers had expected a committee vote on Mr. Bachus' bill by the end of last month. Ms. Waters introduced her bill as the legislative calendar dwindled, and he halted his shortly thereafter.

“Everyone agrees there is a serious problem,” Mr. Bachus said in a statement first released to InvestmentNews.

“Unfortunately, there is no consensus on how to fix it,” he said. “No bill, including the bipartisan bill I offered, will move forward in the committee unless and until there is a consensus.”

It isn't clear how long it will take to reach that consensus. Few legislative days remain before the presidential election, which makes action this year unlikely.

“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. Our only goal should be to deter bad actors and to protect American investors,” Mr. Bachus said in the statement.

“I see no way to do that without timely examinations,” he said. “Who conducts those examinations, and how, is still open for debate, as far as I'm concerned.”

Ultimately, an agreement on adviser oversight will require Democrats and Republicans to work together.

“I've always felt this should not be a partisan issue,” said David Tittsworth, executive director of the IAA.

“Everybody agrees in broad terms what the issue is: How can we increase investment adviser inspections?” he said. “I'd like to explore a bipartisan option, but I'm not certain what that would be right now.”

Finra, which poured $550,000 into lobbying during the first six months of the year, will remain a key player on the issue.

“Finra continues to believe that the current levels of investment adviser oversight and examinations are unacceptable and a risk to investors,” Nancy Condon, Finra's vice president of media relations and web services, said in a statement. “We applaud Chairman Bachus and Congresswoman McCarthy for their efforts to fix this problem, and Finra will continue to work with Congress and the SEC toward a solution to this critical gap in investor protection.”

One of Finra's chief allies took the delay in stride.

“This is well within what we expected,” said Dale Brown, chief executive of the Financial Services Institute Inc. “We've been saying since day one that this would be a multiyear effort.”

In reaching consensus, Mr. Bachus may have to bring his GOP colleagues together first.

“That's certainly a surprise to hear the bill is stalled without getting a vote in committee,” said Duane Thompson, senior policy analyst for fi360 Inc. “That says something about the concerns on the Republican side.”

Opponents of the Bachus-McCarthy bill tried to get Republicans' attention by asserting that it would create a new bureaucracy and threaten the viability of small advisory firms. Finra countered that critics vastly inflated the cost of an SRO while discounting the economies of scale that Finra would bring to adviser oversight.

“It's better to use and enforce existing laws rather than increase redundant red tape that would crush the advisers who serve Main Street,” Mr. Newcomb said. “They're all small-business owners back in the home [congressional] district.”

For now, those advisers have battled Finra to a draw.

[email protected] Twitter: @markschoeff

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