Money managers are fighting legislation that would — for the first time — subject the roughly 4,000 firms associated with broker-dealers to regulation by the Financial Industry Regulatory Authority.
The FINRA provision is part of the Investor Protection Act, approved Nov. 4 by the House Financial Services Committee. The bill includes a variety of other legislative changes that would dramatically enhance government oversight of money managers.
A draft bill introduced by Senate Banking Committee Chairman Christopher Dodd, D-Conn., on Nov. 10, on the other hand, would not subject money managers associated with broker-dealers to FINRA regulation.
Other key provisions in the legislative measures:
• The House bill, expected to be voted on the floor as soon as the first week of December, would require money managers registered with the Securities and Exchange Commission to start paying user fees; the Senate draft would instead enable the SEC to help fund its operations through fees assessed on stock and bond transactions.
• A separate House bill and the Senate draft would require managers of large hedge funds to register at the SEC. Unlike the Senate proposal, the House bill would also require managers of large private equity firms to register.
• Both the House bill and the Senate proposal would shift 4,200 of the about 11,000 SEC-registered money managers — that is, those managers with less than $100 million under management — to state regulation. Under current SEC regulations, money managers with more than $25 million in assets are required to register with the agency.
“The bottom line message for money managers is that they should expect increased regulation and greater scrutiny no matter what happens with the bill,” said David Tittsworth, executive director of the Investment Adviser Association, a lobbying group for money managers in Washington.
But managers are particularly concerned about the prospect for FINRA regulation.
“We recognize (the FINRA provision) is well intentioned, but we are concerned that it would create an uneven playing field for investment advisers by applying different regulatory standards, depending on whether or not the adviser is affiliated with a broker-dealer,” said Jenny Engle, a spokeswoman for Boston-based
Fidelity Investments, which is affiliated with a broker-dealer.
“We're urging our members to contact their (Congress) members to oppose the FINRA provision,” said Mr. Tittsworth.
Mr. Tittsworth said FINRA had demonstrated its ineffectiveness and inefficiency by missing the Bernard Madoff pyramid scheme and other major scandals. “The SEC has admitted that it missed Madoff and that it was a serious mistake,” said Mr. Tittsworth. “But FINRA has said they did nothing wrong, even though a host of legal experts have concluded otherwise. Nobody would argue that FINRA has been a paradigm of regulatory effectiveness.”
In response, Nancy Condon, a FINRA spokeswoman in Washington, said the legislation would “simply allow FINRA to put more boots on the ground, subject to SEC oversight, for those firms already regulated by FINRA” and related parties.
“It is disappointing, but not surprising, that industry groups oppose more frequent examination of their firms. Only 9% of (investment adviser) firms are expected to be examined by the SEC next year. It is obvious that these industry groups would like to keep it that way,” she said.
4,000 managers affected
In Oct. 6 testimony before the House Financial Services Committee, Richard Ketchum, FINRA chairman and CEO, said that about 4,500 of the 11,000 money managers registered at the SEC are either affiliated with broker-dealers or are registered with both the SEC and FINRA.
Mr. Tittsworth said about 550 SEC registrants are dually registered with FINRA. That means the House legislation, if approved, would subject about 4,000 SEC-registered money managers to FINRA regulation, he said.
The opposition of money managers to the provision appears to be having an impact. Rep. Barney Frank, D-Mass., has announced plans to introduce an amendment to eliminate the FINRA provision when the Investor Protection Act is voted on the House floor, Steven Adamske, a spokesman for Mr. Frank, said in an e-mail.
Officials at the mutual fund industry's Investment Company Institute, Washington, Vanguard Group and T. Rowe Price Associates declined to comment. But an ICI spokeswoman said that in general, “ICI strongly supports SEC oversight and examination of investment advisers, as well as full funding for the agency.”
One concern among money managers is that FINRA charges each member company a series of fees to fund its inspections and other operations. FINRA registrants pay annual fees that range from $1,200 for those with annual gross revenues of $1 million or less to 8.55 basis points for those with annual gross revenues of more than $25 billion. Ms. Condon, however, said that FINRA has rebated at least $1,200 to each member firm for this fee during every year since 2001.
According to FINRA's 2008 annual report, the annual fees, together with a variety of other fees that FINRA charges for its services, generated $770 million during 2008.
Doug Halonen is a reporter at Pensions & Investments, a sister publication of InvestmentNews
