State regulators of investment advisers should reach out to the
Financial Industry Regulatory Authority Inc., which provides broker-dealer oversight, to ensure that advisers act in their clients' best interests, according to the new head of the North American Securities Administrators Association Inc.
The group opposes a self-regulatory organization for investment advisers, asserting that the Securities and Exchange Commission should maintain oversight of the sector because an SRO would lack accountability to Congress, transparency and independence. But in a speech today at the NASAA annual conference in Wichita, Kan., new NASAA President Jack Herstein said that even while NASAA fights an SRO draft proposal introduced today in Congress, the group still has to build ties with Finra.
“As states, we need to acknowledge that self-regulation is not going away and we need to embrace our relationship with Finra,” said Mr. Herstein, assistant director of the Department of Banking and Finance in Nebraska. “As is frequently the case, that which unites us is greater than that which divides us.”
Mr. Herstein took office today as the House Financial Services Capital Markets Subcommittee held a hearing in Washington on establishing a universal fiduciary duty for retail investment advice providers, and adviser oversight. The primary proposal for enhancing the latter is a discussion draft bill introduced by full panel chairman Spencer Bachus, R-Ala., that would authorize one or more adviser SROs.
State regulators are concerned that Mr. Bachus' bill would enable an SRO — perhaps Finra — to pre-empt state regulation. At the hearing, Mr. Bachus and Finra chief executive Richard Ketchum provided assurances that state oversight of smaller advisers would not be eclipsed by an SRO.
Under the Dodd-Frank financial reform law, investment advisers with less than $100 million in assets under management have to register with state regulators. That would shift about 3,200 advisers from the SEC to the states, where the AUM limit currently is $25 million.
In addition to bolstering cooperation with Finra, Mr. Herstein said that state securities officials also should work with the Securities Industry and Financial Markets Association. “Collaboration between regulators and industry groups is especially important to leverage our resources for the protection of investors,” he said.
That attitude of cooperation should extend to insurance regulators, he said.
“We coordinate investigations and examinations where there is a shared interest, and meet to discuss common areas of concern and interest,” Mr. Herstein said of his department's interaction with Nebraska's insurance agency. “I encourage each securities regulator to have similar meetings with your jurisdiction's insurance regulator.”
Mr. Herstein touted NASAA's enforcement achievements. He said that last year, state regulators conducted more than 7,000 investigations, which led to $14.1 billion's being returned to investors and more than 1,100 years of jail time handed out to lawbreakers.
The adviser “switch” from the SEC to state oversight would be facilitated by a NASAA initiative that enables regulators to review the applications of advisers who are registered in four or more states to coordinate their transfer.
The group also is helping regulators deal with the influx of new business.
“We have developed uniform examination procedures to promote a consistent and high standard of examination at the state level and advanced risk-analysis software to allow states to rapidly review and rank their investment adviser registrants,” Mr. Herstein said.
The annual conference was held in Wichita to celebrate the 100th anniversary of state securities oversight, which started with a Kansas blue-sky law.
