Given the chance to ease its regulatory burden, the Securities and Exchange Commission was expected to recommend that a self-regulatory organization be established to oversee investment advisers.
After all, the financially strapped SEC was able to review only about 9% of the more than 11,000 registered advisers last year, and it is taking on many more regulatory responsibilities under the Dodd-Frank reform bill.
But in a recent report — itself mandated by the bill — the SEC outlined three options for Congress: designate one or more self-regulatory organizations to oversee advisers, designate the
Financial Industry Regulatory Authority Inc. as the SRO for dually registered reps or impose user fees on advisers so the SEC can increase examinations and enforcement.
The SEC's decision to punt the issue back to Congress surprised observers and angered SEC member Elisse Walter.
One of the most prominent advocates for an SRO, she was incensed that the SEC staff report didn't come down four-square for the SRO option. She issued a statement expressing her disappointment in its conclusion — or lack of one — and in what she called its bias toward the user fee idea.
'LONG-TERM BENEFITS'
The “SRO option has significant and long-term benefits to investors and the commission, and I am on record supporting it — although I do not believe that there has to be a single SRO or that it has to be Finra,” Ms. Walter wrote.
Ms. Walter argues that an SRO would be able to devote more time and resources to adviser oversight than the financially strapped SEC.
Despite the agency's well-known funding difficulties, the tone of the SRO report suggests that the SEC would like to see Congress approve the user fee option, allowing it to maintain its direct jurisdiction over advisers.
One of the reasons may be that the SEC is moving toward promulgating a universal fiduciary standard for personalized retail investment advice.
“The SEC is going to want to retain a lot of their existing authority so that they can say, "We are fighting fraud and abuse, and protecting investors,'” said Arthur Greenspan, a partner at Richards Kibbe & Orbe LLP. “They will want to bring public enforcement proceedings against both broker-dealers and investment advisers. That's the nature of a new provision. You feel the need to justify its existence.”
Some investment advisers want the SEC to maintain its oversight of their businesses.
“I will gladly pay an extra fee to help the SEC compensate the regulators who visit me periodically,” said Barry Glassman, president of Glassman Wealth Services LLC. “We know what we have under SEC regulation. We don't know what a new SRO would look like or how onerous it would be.”
Mark Tepper, president and founder of Strategic Wealth Partners Ltd., also favors the user fee approach.
“An SRO could create a whole new list of issues to look at in an audit process,” Mr. Tepper said. “That could be more costly for the investment advisers.”
Advocates for an SRO say that advisers can work for years without ever having to face an SEC or state review.
David Massey, deputy securities administrator in North Carolina and president of the North American Securities Administrators Association Inc., is making the case to Congress that “it is worthwhile to look at a pay-as-you-go system.”
He said that advisers would be assessed fees only for oversight rather than having to pay yearly dues to an SRO.
“I'm not sure that the user fee might not be more cost-effective,” Mr. Massey said.
MOMENTUM HAS SLOWED
Michael Koffler, a partner at Sutherland Asbill & Brennan LLP, said the SEC report created uncertainty on the issue of oversight. “The momentum for an SRO has slowed down,” he said, “but a lot of people think the rationale for an SRO still exists.”
One person who won't be weighing in on that determination is SEC Chairman Mary Schapiro. As a former chief executive of Finra, she has recused herself from any involvement with the SRO issue.
E-mail Mark Schoeff Jr. at [email protected].
