Frustrated by ongoing funding challenges at the Securities and Exchange Commission, a consumer group has eased its opposition toward establishing a self-regulatory organization for investment adviser oversight.
A longtime champion of keeping adviser examinations under the SEC roof, the Consumer Federation of America acknowledged on Tuesday that the agency might need outside help.
“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 investor protection, said in prepared testimony before the Senate Banking Committee. “Specifically, we have concluded that a properly structured SRO proposal would be a significant improvement over the status quo.”
Ms. Roper was referring to the fact that the SEC was able to examine only about 9% of the approximately 11,800 advisers under its aegis last year.
In a report to Congress in January, mandated by the Dodd-Frank financial reform law, 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.
The CFA has been part of a group of organizations, including the North American Securities Administrators Association Inc., the Investment Adviser Association and the Financial Planning Coalition, that has been advocating increased user fees to fund SEC oversight.
Ms. Roper emphasized that the CFA still favors the user-fee option. 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 setting in.
If an SRO is coming, the consumer group wants to help shape it, according to Ms. Roper.
“Our preferred approach is user fees and adequately funding the SEC to perform the function,” Ms. Roper said in an interview after the Senate hearing. “What has changed in our position is that we believe [an SRO] represents an improvement over the status quo.”
Before an SRO is established, however, Ms. Roper said that key questions must be answered. Among them: How would it be structured? How can the risks of industry capture be avoided? What are the implications of strong industry opposition? Should an SRO be inspection-only or also conduct rule making?
Finra, which regulates broker-dealers, has been lobbying Congress to become the adviser SRO. The organization welcomed the CFA's change of stance.
“We have long believed that an SRO approach to assist the SEC with overseeing investment advisers would significantly enhance the protection for those investors who invest with an investment adviser,” Howard Schloss, Finra executive vice president, said in a statement. “And we certainly agree with Ms. Roper that this is a problem that should be resolved sooner rather than later.”
Ms. Roper is not prepared to endorse Finra as the adviser SRO.
“It would depend on what proposal Finra puts on the table,” she said.
The securities administrators continue to oppose an SRO for advisers.
“NASAA questions the wisdom in the long-term of outsourcing a traditional government responsibility to an SRO whose members are the regulated,” NASAA president David Massey, deputy securities administrator in North Carolina, said in an interview after the Senate hearing.
He said that it is not clear that an SRO would be more cost effective than SEC oversight. Under one, advisers would have to pay membership fees. With the SEC, they would just pay for exams. He likened the situation to visiting a gasoline station.
“You only go whenever you need to fill up,” Mr. Massey said. “You don't continue to pay for the gas.”
During the hearing, several experts called for the SEC to be self-funding. Under that approach, the agency would set its own budget based on fees it charges industry. Currently, those fees fund an agency budget whose level is set by Congress. Most other financial regulators are self-funding.
“The SEC should not be a stepchild,” said Harvey Pitt, a former chairman of the commission.
But lawmakers want to maintain control of the agency's purse strings. The problem, critics say, is that that situation prevents the SEC from obtaining the resources it needs. The House Appropriations Committee recently approved a bill that would freeze the SEC budget at its fiscal 2011 level, $1.185 billion — about $222 million less than the Obama administration requested.
“Self-funding, I believe, would make the SEC less accountable to Congress,” said Alabama Sen. Richard Shelby, ranking Republican on the Senate Banking Committee.
