Less than two weeks after declaring that his legislation aimed at shifting regulation of investment advisers was on hold, House Financial Services Committee Chairman Spencer Bachus, R-Ala., has reopened the debate by taking a shot at advisers.
In an opinion article in Monday's Wall St. Journal, Mr. Bachus asserted that the only way to prevent another investor rip-off like the $65 billion Ponzi scheme perpetrated by Bernard Madoff was to establish a self-regulatory organization to oversee advisers. The lawmaker said the Securities and Exchange Commission failed to prevent the fraud.
Mr. Bachus introduced a bill in April with Rep. Carolyn McCarthy, D-N.Y., that would authorize one or more SROs. “The federal regulators whose job is to enforce the law and protect investors from bad actors often had no clue or took no notice of what was going on right under their noses until it was too late,” Mr. Bachus wrote. “A bipartisan bill moving through Congress could prevent such losses in the future by giving financial advisers a mandate to regulate themselves.”
On July 25, Mr. Bachus suspended that bill following the introduction of a measure by Rep. Maxine Waters, D-Calif., a member of the House Financial Services Committee, that would allow the SEC to charge advisers user fees to fund examinations.
Advisers breathed a sigh of relief when Mr. Bachus said that no legislation would move forward until consensus was reached. Most strongly resist an SRO, which they contend would impose a costly new layer of bureaucracy that would threaten the viability of small advisory firms. They're especially worried that the
Financial Industry Regulatory Authority Inc., the broker SRO, will become the advisor SRO, a role that the agency covets.
In his article, Mr. Bachus suggested that advisers are trying to avoid further regulation.
“Understandably, many investment advisers are not excited about increased oversight, so their lobbying organizations have come out against our bipartisan bill,” Mr. Bachus wrote.
David Tittsworth, executive director of the Investment Adviser Association, said he was disappointed by Mr. Bachus' article.
“It's full of inaccuracies and misstatements,” Mr. Tittsworth said.
For instance, he said that advisers agree with the need for more regulation of the sector. But they want it done by the means that Ms. Waters laid out, rather than through an SRO.
“We've been on record for years supporting that option,” Mr. Tittsworth said.
Mr. Bachus suggested that Ms. Waters' approach wouldn't work, because the SEC has said that it wouldn't be able to examine more advisers even if it received more funding. “That has nothing to do with how the Waters bill would operate,” Mr. Tittsworth said. That legislation would allow the SEC to create a new revenue stream dedicated to adviser oversight.
With the congressional calendar dwindling quickly, it's unlikely that the two sides of the SRO debate can come together before Congress adjourns in December. The House Financial Services Committee has not scheduled a vote on either Mr. Bachus' or Ms. Waters' bill.
Both respond to a January 2011 SEC report, mandated by the Dodd-Frank financial reform law, in which the agency indicated that it lacks to resources to examine more than about 8% of registered advisors, who currently number about 10,000.
The agency offered three ways to strengthen adviser oversight: establish an SRO, allow the SEC to charge user fees, or extend Finra's reach to include advisers dually registered as brokers. Each option would require congressional approval.
Parsing out the blame for Mr. Madoff will continue to be central to the SRO debate.
“The SEC failed to protect investors and detect fraud even though evidence about the Madoff and [Allen] Stanford Ponzi schemes was handed to them by insider informants on a silver platter,” Mr. Bachus wrote.
Finra maintains — and reviews by the agency as well other organizations conclude — that Mr. Madoff's fraud occurred in the investment advisory side of the operation, to which Finra had no access.
Mr. Madoff registered as an investment adviser with the SEC in 2006. His fraud was uncovered in 2008.
Finra should have reviewed internal controls at Mr. Madoff's firm, which shouldn't have been able to stiff-arm Finra inspection or information requests, John Coffee, a professor of law at Columbia University, said during 2009 congressional testimony.
Mr. Tittsworth said it's unfair to cite the Madoff case to support an SRO, because there's plenty of blame to go around on that score.
“Using Madoff as the poster child is absolutely misleading,” Mr. Tittsworth said. “The SEC doesn't deserve to be exonerated, but the NASD/Finra clearly had jurisdiction over the Madoff firm at all times.”
