InvestmentNews Editorials

Two SROs may be better than one

Sep 18, 2011 @ 12:01 am

Seemingly lost amid the contentious battle over how investment advisers are to be regulated is one unassailable truth: Millions of investors are at risk of being defrauded because the SEC lacks the financial resources to do an adequate job of policing the advice business.

It's also true that Congress' bull-headed opposition to a variety of approaches put forth to solve this crisis — increasing appropriations to the Securities and Exchange Commission, allowing the agency to be self-funded or permitting it to levy user fees for examinations — makes it impossible to foresee a situation in which the commission could obtain the resources it needs to fulfill its mandate to protect investors anytime soon.

Steadfast in our belief that regulation that benefits individual investors also benefits the financial advisory business, we have concluded that a well-structured self-regulatory organization or, better yet, two SROs, would be a big improvement over the status quo.

Imperfect as it is, having two effective SROs would be better than having one ineffective regulator.

In a report to Congress, the SEC acknowledged that the percentage of investment advisers that it examined in 2010 fell to 9%, from 18% in 2004. That means that the number of years on average between examinations had climbed to 11, from six.

Investors deserve protection from unscrupulous advisers and abusive business practices.

It's for these reasons that we endorse — in concept — a draft bill proposed two weeks ago by House Financial Services Committee Chairman Spencer Bachus, R-Ala., that would authorize one or more SROs to oversee the nation's 11,539 investment advisers. The draft, as written, would give the investment adviser SRO, or SROs, a broad range of rule-making authority, subject to SEC approval.

Our tentative support of the legislation coincides with a congressional hearing last Tuesday to discuss options for improving investment adviser oversight.

Like leaders of the pro-investor advocacy group Consumer Federation of America, who testified before the House Financial Services Capital Markets subcommittee last week, we encourage Congress to consider putting two SROs in charge of investment adviser oversight.

Under such a scenario, the Financial Industry Regulatory Authority Inc., which already oversees 4,500 broker-dealers, would police the 88% of investment advisers dually registered as broker-dealers. The main benefit of putting Finra in charge of those advisers is that the agency already has an existing enforcement structure and staff in place.

The remaining 12% of investment advisers would be overseen by a newly created SRO and would be more attuned to a fee-based model.

Establishing a separate SRO for fee-based advisers should alleviate concerns that the distrust that some investment adviser/financial planner trade groups feel toward Finra would impede the ability for it to be effective.

To be sure, a two-SRO system isn't perfect.

For starters, it would increase the risk of inconsistency in the making, and enforcement, of rules. Even worse, it's possible that the SROs could find themselves competing for members by adopting less rigorous standards.

One way to mitigate those risks, however, would be to limit the scope and authority of both SROs to performing inspections. That would place full responsibility for consistent rule making squarely in the hands of the SEC. It would also alleviate some of the costs associated with setting up the SROs.

A two-SRO system would require a high level of commitment from the SEC to ensure that the SROs were on the same page in how they interpreted and enforced investment adviser rules and regulations.

The bottom line is that investors deserve more protection than they are getting. If Congress can't see to it that the SEC has the funds it needs to do its job, then its incumbent upon Congress to allow for the immediate creation of an investment adviser SRO, or SROs.

0
Comments

What do you think?

View comments

Upcoming event

Nov 19

Conference

New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Schwab's Jeff Kleintop: Prep for volatility given China trade uncertainties

China could be considered a developed market in five to seven years , according to Jeff Kleintop, chief global investment strategist, Charles Schwab.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Funding for Reg BI, other SEC advice reform efforts denied in Waters amendment

House likely to approve measure that effectively kills rule package, but it faces uphill battle in Senate

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print