Settlement with SEC a distant memory by the time investment adviser oversight issue is settled
On Wall Street, fortunes can be made and lost over the course of a trading day, and firms such as MF Global can collapse in a week.
A few hundred miles to the south in Washington, nearly everybody is playing the long game. If you're advocating for legislation, it will likely take years to come to fruition. That's certainly the case for a measure that would authorize one or more self-regulatory organizations for investment advisers.
This fall, House Financial Services Committee Chairman Spencer Bachus, R-Ala., offered a draft SRO bill. He hasn't indicated when he will introduce formal legislation. But after the bill is dropped into the hopper, it will take months for the House to act, and the Senate is likely not to take up a similar bill before the end of the 111th Congress in December 2012. That means it will have to be reintroduced in 2013, starting the process over again from Square One.
This meandering path is probably a good thing for Finra, which is lobbying lawmakers to approve an SRO. As you know, Finra suffered a black eye last week when the SEC ordered it to improve its internal policies and procedures for document sharing.
The SEC required Finra to make the changes as part of a settlement in a case stemming from an incident in 2008 in which Finra's Kansas City, Mo., office doctored documents intended for the SEC. It was the third time in an eight-year period that Finra gave the SEC altered reports.
Adviser groups said the incident was indicative of the problems posed by SRO oversight. Advisers detest the idea that Finra, which oversees broker-dealers, could become their regulator, too. It looks as if the SEC settlement bolsters their case.
But the long and winding path that a draft bill must take to becoming a law may weaken the momentum the anti-SRO argument gained last week.
“There's a good chance memories will fade,” said Deborah Meshulam, a partner and head of the securities enforcement practice at DLA Piper.
If Finra doesn't get into any more trouble, it will remain in a strong position to become an adviser SRO.
“Barring another Bernie Madoff, I don't think one event like this is going to change the dynamic of Finra's lobbying effort,” said Duane Thompson, senior policy analyst at Fi360, a firm that specializes in fiduciary-duty training and software. “It's not a huge setback, but it doesn't help.”
The adviser community may have been riveted on the SEC-Finra dust-up, but Capitol Hill wasn't necessarily paying attention.
“The committees that need to pass this legislation are somewhat insulated from the daily noise of what is happening with the agencies,” Mr. Thompson said.
In fact, the timing and content of the settlement with the SEC may benefit Finra.
“It is good that this is out and dealt with before there's any decision regarding an SRO for investment advisers,” said Ms. Meshulam, a former SEC chief litigation counsel.
In its agreement with the SEC, Finra said it will hire a consultant to review its internal practices and make recommendations.
Finra, in a statement last week, also emphasized that it had self-reported the matter, cooperated with the SEC investigation, appointed new leadership in Kansas City and made changes to its document-handling procedures.
“It shows that senior management acted responsibly — and they will be the ones setting up the [adviser] inspection program, if they're authorized to do so,” said Eugene Goldman, a partner at McDermott Will & Emery.
But SRO opponents will continue to question Finra's fitness to oversee advisers.
“This may be a little bit like the problem Herman Cain is having,” said Knut Rostad, president of the Institute for the Fiduciary Standard, referring to the GOP presidential candidate who has been dogged by sexual-harassment charges. “It appears to be a very serious infraction. The question is how seriously it has been taken.”
