Congress finally has recognized that investment adviser oversight is sorely lacking, putting the financial security of millions of Americans at risk. That is commendable, but the solution being deliberated by lawmakers to address the SEC's weakness as an advisory regulator — funding constraints that are unlikely to change — has significant shortcomings and shouldn't be supported.
The main problem with the proposed Investment Adviser Oversight Act of 2012, which would permit the Securities and Exchange Commission to delegate oversight of advisers to one or more self-regulatory organizations, is that it would exempt many institutions and firms from SRO supervision.
The exemptions no doubt are intended to reduce opposition to the bill, especially from those with the financial muscle to wage a good fight.
Firms that manage mutual funds, for example, would be exempt. So would all those with 90% of their assets in: charitable funds, hedge funds, retirement plans, mortgage pools or with “qualified purchasers”— that is, clients with $5 million or more in assets to invest.
If the bill were passed as written, advisers who cater to the richest clients would continue to be regulated by the SEC at no additional cost. Those focused on a less affluent client base would be overseen by a self-regulatory organization — most likely the
Financial Industry Regulatory Authority Inc. — for a fee.
There are many concerns about the exemptions contained in the legislation, which was introduced in April by House Financial Services Committee Chairman Spencer D. Bachus, R-Ala., and Rep. Carolyn McCarthy, D-N.Y.
In a letter to the House Financial Services Committee June 4, the investor advocacy group Consumer Federation of America pointed out the absurdity of the exemptions.
“Because so many advisers would continue to be subject to direct SEC oversight under this bill — including those advisers with large, complex, high-risk operations that are most difficult to oversee and who manage the vast majority of assets — it is not even clear whether this legislation would solve the basic SEC resource problem it is intended to address,” wrote Barbara Roper, director of investor protection for the CFA.
Implementation of the bill “would be like having a national park [that] the wealthy are allowed to use for free, but only middle-income and lower-income people are required to pay a fee,” Mercer Bullard, president and founder of the investor advocacy group Fund Democracy and an associate professor of law at the University of Mississippi, told WealthManagement.com.
ADEQUATE FUNDING
In a perfect world, Congress would provide the SEC adequate funding for investment adviser oversight, either through appropriations, allowing the commission to use the fees and penalties it collected to fund its operations or permitting it to levy user fees for examinations.
It is clear that most advisers prefer user fees to being overseen by an SRO, especially Finra. In an
InvestmentNews survey last week, 58.7% of 293 registered investment advisers said that they are in favor of allowing the SEC to charge advisers a user fee for examinations.
But political pragmatism calls for other measures to be considered. One worth looking at is the idea of putting two SROs in charge of investment adviser oversight.
Under such a scenario, Finra, which already oversees 4,500 broker-dealers, would police the 88% of investment advisers who also were registered representatives. Finra's expanded duties should be contingent on one thing: Investment advisers under the regulator's rule must be held to a true fiduciary standard of conduct, not one that hedges in its mandate to put investors' interests first.
The remaining 12% of investment advisers would be overseen by a newly created SRO, one that would be more attuned to a fee-based model. That would address the issue of the distrust that some investment adviser/planner trade groups feel toward Finra.
If the scandals involving Bernard Madoff and R. Allen Stanford proved nothing else, it is that investors are in need of more protection from unscrupulous registered investment advisers.
The Investment Advisor Oversight Act of 2012, though well- intended, falls short in providing them that and should be withdrawn or rewritten.
