SRO push is gaining momentum

The creation of a self-regulatory organization for investment advisers took a step forward last week when the Consumer Federation of America dropped its longtime opposition to the idea, saying that an SRO would be better than relying on the chronically underfunded SEC as a regulator

The creation of a self-regulatory organization for investment advisers took a step forward last week when the Consumer Federation of America dropped its longtime opposition to the idea, saying that an SRO would be better than relying on the chronically underfunded SEC as a regulator.

“Having spent the better part of two decades arguing for various approaches to increase SEC resources for investment adviser oversight with nothing to show for our efforts, we have been forced to reassess our opposition to the SRO approach,” Barbara Roper, the advocacy group’s director of investor protection, said in prepared testimony for a Senate Banking Committee hearing on investor protection provisions in the Dodd-Frank financial reform law.

“Specifically, we have concluded that a properly structured SRO proposal would be a significant improvement over the status quo,” Ms. Roper said. She was referring to the fact that the Securities and Exchange Commission was able to examine only about 9% of the approximately 11,800 advisers it is responsible for last year.

In a report to Congress in January, the SEC recommended three ways to increase adviser oversight — allow the agency to charge user fees to advisers for exams, establish an SRO or enable the Financial Industry Regulatory Authority Inc. to extend its reach to advisers who are dually registered as broker-dealers. Any of the proposals would require congressional authorization.

While not endorsing Finra as an SRO at this time, Ms. Roper said “it would depend on what proposal Finra puts on the table.”

The CFA has been part of a group of industry organizations, including the Investment Adviser Association Inc. and the Financial Planning Coalition, that has been advocating increased user fees to fund SEC oversight of investment advisers. It was not clear whether the CFA’s changing position would lead the other groups to soften their stance on an SRO. But the reality of the congressional budgeting process, which likely will leave the SEC hundreds of millions of dollars short of the funds it says it needs to perform its investor protection duties, is changing the atmosphere of the debate.

The consumer group is trying to keep itself well-positioned in the event that Congress approves an SRO, according to Ms. Roper. “If they’re going to take this approach, CFA wants to be part of the discussion about how that SRO would be structured to make sure investor interests are protected,” she said.

SYMPATHETIC

The CFA’s allies seem sympathetic to its new position on an SRO. “CFA’s frustration with the lack of resources available to the SEC for adviser oversight is understandable,” the Financial Planning Coalition said in statement.

At the same time, the FPC reiterated its opposition to an SRO. “A radical change to the structure for overseeing advisers — by creating an expensive new layer of regulation and bureaucracy — is not a sensible way to address the resource issue,” its statement continued.

However, Scott Brewster, president of Brewster Financial Planning LLC and a former president of the New York chapter of the Financial Planning Association, said the FPC will come under pressure to educate the public and the press about the issue. “If giving advice in the client’s best interest is not fully absorbed in the financial media, how is examining advisers and that aspect of our industry going to be understood?” he asked. “ They face a tough job.”

David Tittsworth, executive director of the Investment Adviser Association, which represents registered investment advisers, downplayed the CFA’s stance. “I don’t see it as a major shift,” he said. “We’ve still got a long way to go in the debate.”

But groups supporting an adviser SRO — and promoting Finra for the role — have jumped on the CFA’s change of heart.

“I applaud Barbara’s testimony and am pleased that CFA agrees with us that the best way to protect investors is to ensure advisers have the proper oversight, and the most effective way to do that is through an SRO,” said Dale Brown, chief executive of the Financial Services Institute Inc., which represents independent broker-dealers.

Finra, which regulates broker-dealers, has been lobbying Congress to become the adviser SRO.

One question that must be addressed is how to establish an SRO when most advisers oppose one, according to Ms. Roper. They are especially passionate about keeping Finra away.

But the reality is that Finra is well-positioned to take up the adviser inspection mantle, according to some observers.

“Finra is the obvious choice, if a rather unpalatable one,” Bradly Tharp, a financial planner with Family WealthCare Center, wrote in an e-mail. “Finra has few fans and many flaws. Perhaps the inclusion of the advisory world will improve Finra. I have my doubts that Finra will improve them or us.”

Finra repeatedly has said that it would not subject advisers to its broker-dealer oversight regime but rather develop a new approach that takes into account the characteristics of the adviser business model. It also said it would include advisers on the panel overseeing adviser exams.

During the hearing, several experts called for the SEC to be self-funded. Under that approach, the agency would set its own budget based on fees it charges. Currently, those fees fund an agency budget whose level is set by Congress.

E-mail Mark Schoeff Jr. at [email protected].