Many investment advisers cheered last week, as legislation was introduced on Capitol Hill that would keep them under the purview of the Securities and Exchange Commission. Even better for advisers, the measure had the effect of halting a bill that would shift adviser oversight from the SEC to a self-regulatory organization.
But advisers shouldn't get their hopes up about
legislation introduced by Rep. Maxine Waters, D-Calif., with Rep. Barney Frank, D-Mass., and Michael Capuano, D-Mass., that would allow the SEC to charge advisers user fees to fund examinations. It faces a steeper climb than the SRO bill, which was written by House Financial Services Committee Chairman Spencer Bachus, R-Ala., and introduced with Rep. Carolyn McCarthy, D-N.Y.
Each of the sponsors of the competing bills is a member of the House financial panel. Last week, Mr. Bachus said that
no legislation is moving ahead without consensus on how to strengthen investor protection by increasing the number of adviser exams performed annually.
The SEC issued a report in January 2011, mandated by the Dodd-Frank financial reform law, that said that the agency lacks the resources to examine annually more than about 8% of registered advisers, which currently number about 10,000.
The three recommendations for increasing adviser oversight -- allowing the SEC to impose user fees, establishing an SRO or expanding the reach of the Financial Industry Regulatory Authority Inc., the broker SRO, to include advisers dually registered as brokers – all require congressional approval.
Advisers see an SRO as a costly new layer of bureaucracy and stridently oppose Finra filling the SRO role. They want the SEC to remain their regulator.
The problem is that Republicans in Congress, who control the House and may take over the Senate after the November elections, are not inclined to give the SEC a significant budget increase or more latitude.
The Democratic-led Senate Appropriations Committee approved a bill that would provide the SEC the full $245-million boost to its $1.32 billion budget it requested. The
Republican-led House Appropriations Committee only gave the SEC a $50-million increase. Congress is likely to pass in September another so-called continuing resolution that would keep federal agencies at roughly their current budget level into next year.
Ms. Waters' bill is designed to give the SEC the authority to generate revenue from advisers earmarked for exams.
“If you, Congress, are not willing to allocate the money, we're willing to pay for it,” said Jonathan Roberts, senior vice president and chief compliance officer at Klingenstein Fields & Co. LLC.
Mr. Roberts was one of about 50 advisers making the case for user fees in a lobbying day sponsored by the Investment Adviser Association in early June.
The challenge for advisers is to convince Republicans to get behind the idea of a user fee. Most in the GOP equate a user fee with a tax. One theory that is on the verge of becoming a natural law on Capitol Hill is that the way to coalesce Republican opposition to anything is to call it a tax.
Ms. Waters measure has a tough road ahead in gaining GOP cosponsors. One bright spot is that SRO opponents seem to have instituted a no-gloating rule over the stalling of Mr. Bachus' bill.
“We agree with Chairman Bachus that there's a serious problem with the lack of oversight of investment advisers and thank him for shining a light on the need for more examinations to better protect investors,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc. “We're gratified he's stepping back to look for other solutions.”
Jack Herstein, president of the North American Securities Administrators Association, wants to ensure that any new approach lets state regulators maintain their purview over small to mid-size advisers.
“The oversight of state advisers has never been called into question, until the chairman put it in his bill,” Mr. Herstein said. “Everyone agrees that the oversight of federally registered advisers should be strengthened. The chairman's bill went at it the wrong way.”
Finding path on which everyone can travel may take a long time.
