A congressional hearing next week that will delve into the issues of fiduciary duty and a self-regulatory organization for advisers also is likely to provide a platform to introduce an SRO bill — or at least an outline that could turn into a measure.
The session will encompass “legislative proposals to improve investment adviser oversight,” according to a notice posted on the House Financial Services Committee website last night.
That move takes the hearing, scheduled for next Tuesday, beyond being a fact-finding educational session for members of the Capital Markets subcommittee. The event will mark the first time that Congress has formally addressed the fiduciary and SRO topics since the Dodd-Frank financial reform law was enacted in July 2010.
The committee did not respond to a request on Wednesday for the bill or bill outline. It is likely that the measure would address an SRO.
The hearing will concentrate on two reports required by Dodd-Frank that were delivered to Securities and Exchange Commission in January.
One called for the SEC to promulgate a regulation that would impose a universal fiduciary duty on anyone providing retail investment advice — a rule that would require broker-dealers to adhere to the same standard of care, acting in their client’s best interests, that investment advisers must meet.
The other report provided three recommendations for Congress on how to increase oversight of investment advisers — allow the SEC to charge a user fee for examinations, establish an SRO for advisers or extend the jurisdiction of the
Financial Industry Regulatory Authority Inc. to include investment advisers that are dually registered as broker-dealers.
Congress would have to authorize any of the options. It’s not clear whether legislative language — or a discussion draft — for an SRO will be released prior to, or at, next week’s hearing.
During the House debate on the Dodd-Frank bill in December 2009, Rep. Spencer Bachus, R-Ala., now chairman of the Financial Services Committee, offered an amendment that would establish an SRO for advisers associated with a broker-dealer. He said he was proposing the measure in order to address situations like the one with Bernard Madoff’s $65 billion Ponzi scheme, in which Mr. Madoff ran both a broker-dealer and an advisory firm.
“I was saying ‘Let Finra go ahead and examine the investment advisers’ — these dual operations where you have both,” Mr. Bachus said on the House floor in 2009. “Finra inspected the [Madoff] broker-dealer at least every other year, but the fraud didn’t occur there.”
In its report on adviser oversight, the SEC acknowledged that it is able to examine only about 9% of investment advisers annually.
With Congress embroiled in a debate over cutting the federal budget, it doesn’t appear inclined to provide any more funding to the SEC. The House Appropriations Committee approved a bill in June that freezes the SEC budget at the fiscal 2010 level of $1.18 billion.
“Finra believes that the solution to this problem, given the current budget realities, is to authorize one or more SROs to examine investment advisers,” said Howard Schloss, Finra executive vice president for corporate communications. “We believe we are well-positioned” to fill that role.
Finra will be able to make its case when officials testify in front of the House committee next week. The Investment Adviser Association will provide a different perspective during its testimony.
“We continue to believe that having the SEC as a single government regulator, accountable to Congress and the public, is the best option for investment adviser oversight,” said IAA executive director David Tittsworth. “It would be harmful to [separate] the examination arm from the policy-making arm.”
The complete witness list for the hearing has not yet been announced.
