Opponents of legislation that would shift investment-adviser oversight from the Securities and Exchange Commission to an industry self-regulatory organization – likely the
Financial Industry Regulatory Authority Inc. – will be outgunned at a Wednesday hearing on the bill.
The House Financial Services Committee will take up the Investment Adviser Oversight Act of 2012 with a
witness panel dominated by supporters of the bill, which would authorize one or more SROs for advisers with retail clients.
Four witnesses -- Finra chief executive Rick Ketchum and representatives of the Financial Services Institute, the National Association of Insurance and Financial Advisors and the Securities Industry and Financial Markets Association – will testify in favor of an SRO and two – the Investment Adviser Association and the North American Security Administrators Association – will be against it.
The panel chairman, Rep. Spencer Bachus, R-Ala., introduced the
bill in late April as a way to strengthen investor protection by increasing adviser examinations. He cites the fact that the SEC reviewed only about 8% of nearly 12,000 register investment advisers in 2011 while Finra, the broker SRO, examined 58% of its registrants.
“The SEC has also said that even if the agency receives the full amount of funding it has requested for fiscal year 2013 (about $245 million), the agency would still be unable to examine 89% of investment advisers,” a committee press release states.
An SRO opponent questioned the assertion.
“That does not ring true with an economic analysis we know has been done,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.
She was referring to a December Boston Consulting Group
study that pegs the cost of an SRO at twice as much as fully funding the SEC. Finra disputes that cost estimate.
Mr. Bachus introduced the SRO bill with Rep. Carolyn McCarthy, D-N.Y., in response to a 2011 SEC study that indicated that the agency lacks adequate resources to regulate investment advisers.
The report offered three ways to increase the examination rate: allow the SEC to charge a user fee for exams; establish an SRO; or extend Finra's reach to include advisers who are dually registered as brokers. Each option requires congressional approval.
Finra covets the role of SRO adviser, a prospect that repels advisers, who say Finra would be overbearing and lacks understanding of the adviser business.
In written testimony released on Tuesday, Mr. Ketchum drove home the point that the SEC oversight is inadequate.
“No one involved in regulating securities and protecting investors can be satisfied with a system where only 8% of regulated firms are examined each year,” Mr. Ketchum said. “It is completely unacceptable and represents a major gap in investor protection. Given our experience operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem. ”
Mr. Ketchum tries to assuage adviser fears about Finra oversight.
“If Finra becomes an SRO for investment advisers, we would implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business,” Mr. Ketchum said. “Finra would establish a separate entity with separate board and committee governance to oversee any adviser work and would plan to hire additional staff with expertise and leadership in the adviser area.”
Mr. Ketchum's words are unlikely to reassure David Tittsworth, executive director of the Investment Adviser Association, who also will testify.
He asserts that Mr. Bachus' SRO bill contains so many exemptions – for advisers to mutual funds,
private equity and hedge funds and for those for whom 90% of assets under management are comprised of individual with $5 million in investments or institutions with $25 million – that it unfairly targets small advisers.
“The substantial costs and bureaucracy of an additional, unnecessary layer of SRO regulation and oversight of advisory firms would have a significant adverse impact on small businesses and job creations,” Mr. Tittsworth said.
He is especially critical of Finra.
“We particularly oppose extending Finra's jurisdiction to investment advisers due to its lack of transparency and accountability, questionable track record, the costs involved, and its experience and bias favoring the broker-dealer regulatory model,” Mr. Tittsworth said. “User fees would provide stable yet scalable resources to support and strengthen the SEC's examination of investment advisers.”
Getting that point across on Wednesday could be tough.
“The viewpoints of the investment advisory profession are underrepresented on the panel even though they're in the bullseye of the legislation,” Ms. Mohrman-Gillis said.
