The budget impasse in Washington has knocked the Securities and Exchange Commission to the mat and if Congress pushes the country over the fiscal cliff, the agency could be down for the count when it comes to regulating investment advisers.
As bad as that sounds, it's good news for proponents of efforts to shift adviser oversight from the SEC to a self-regulatory organization, who argue that the commission is destined to fall chronically short of the resources required for adviser supervision.
To counteract those efforts, the Financial Planning Coalition warned Congress last week that a stopgap budget measure it passed and the impending fiscal cliff threaten the regulator.
“When Congress convenes, we urge lawmakers to make certain the SEC can carry out and strengthen its monitoring of investment advisers,” the coalition said in a statement. “The SEC is the body most capable of conducting thorough, efficient investment oversight to protect consumers.”
With no budget agreement in sight, lawmakers — before skipping town to campaign last month — passed a bill to keep federal agencies operating at their current budget levels until next March.
That put an immediate crimp in the SEC, which had been seeking an increase in funding for fiscal 2013 (which begins today) of $1.57 billion, from $1.32 billion.
"REASONABLE USER FEES'
On top of that challenge, the SEC is teetering on the fiscal cliff along with the rest of the government. If congressional negotiations fail and more than $100 billion in spending sequestration goes into effect Jan. 1, the SEC budget will be cut by about $117 million.
The Financial Planning Coalition, which comprises the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors, took advantage of the looming fiscal cliff to push for legislation written by Rep. Maxine Waters, D-Calif., that would allow the SEC to fund adviser exams through user fees.
The SRO bill, written by House Financial Services Committee Chairman Spencer Bachus, R-Ala., effectively died for this year when the panel failed to vote on the measure before Congress adjourned. It is unlikely to reappear during the lame-duck session.
“It does appear we've dodged that bullet for now,” David Tittsworth, executive director of the Investment Adviser Association, said at a forum last Tuesday in Washington sponsored by the Cato Institute and the Institute for the Fiduciary Standard.
In addition to the fiscal cliff, the election could affect the atmosphere for an SRO bill by changing the makeup of congressional and SEC leadership.
“In terms of [legislative] strategy, we need to see what happens on Nov. 6 before I can give you more of an intelligent answer,” Mr. Tittsworth said.
Even though Mr. Bachus is stepping down as House Financial Services Committee chairman, he or one of his GOP colleagues is likely to reintroduce an SRO bill next year.
Mr. Bachus maintains that an SRO would strengthen investor protection by increasing the number of adviser examinations.
In a January 2011 report to Congress mandated by the Dodd-Frank financial reform law, the SEC said that it lacked the funding to conduct annual examinations of more than about 8% of the nearly 12,000 SEC-registered advisers at the time.
WARY OF FINRA
Many investment advisers contend that the bill would impose a costly new layer of regulation that would threaten the viability of small firms. They are also wary of the
Financial Industry Regulatory Authority Inc., the broker SRO, which is pushing to enlarge its jurisdiction to include advisers.
“You can't continue to gut the SEC in resources, and then be shocked and dismayed that they can't examine enough advisers,” said Peter Mafteiu, a principal at Sound Compliance Services LLC.
Nathan Garcia, an associate at MCR Financial LLC, opposes the SRO legislation.
“If this bill increased funding of the SEC ... then I would be im-pressed,” he said. “I'm not a huge fan of the idea of Finra being the SRO.”
Finra says that it is well-positioned to regulate advisers and that it would set up a separate governance structure sensitive to the advisory business model.
“It's premature to comment, other than to say that we will continue to speak out as long as the gap in investor protection exists,” Finra spokeswoman Nancy Condon wrote in an e-mail.
The arguments Finra makes for the bill are echoed by George Pickett, a principal at Centerpoint Advantage LLC.
“There is inequitable oversight between advisers and registered representatives,” he said. “This legislation would create a path toward correcting those disparities.”
As a registered investment adviser and a broker, Mr. Pickett is regulated by the SEC and Finra. He wants regulation consolidated under Finra.
“They already do a far better job of oversight of brokers than the SEC does of advisers,” Mr. Pickett said.
An SRO bill next year must attract more Republicans. Several GOP members of the House Financial Services Committee expressed qualms about the measure at the June hearing.
“You get the sense that Republicans aren't of a single mind on this issue,” said Dan Barry, the FPA's managing director of government relations and public policy.
Mr. Bachus has said that he wants to achieve consensus before moving forward. That could take a long time — and perhaps require another SRO champion.
[email protected] Twitter: @markschoeff
