Investment advisers, state regulators and consumer advocates were astonished by the easy adoption of a key addition to the Investor Protection Act that would give Finra power to oversee any adviser associated with a registered broker-dealer, including about 500 dually registered Finra members.
That amendment, which the House Financial Services Committee approved last Wednesday by a voice vote, would give the Securities and Exchange Commission the authority to allow the
Financial Industry Regulatory Authority Inc. to expand its oversight of brokers' registered investment advisers.
That would cover a major chunk of the investment advisory business.
“Finra is not the appropriate regulator for overseeing advice,” said Richard Salmen, president of the Financial Planning Association. “Finra is about sales products, about sales practices, [and] dealing with salespeople. That's a totally different culture than a fiduciary-based advisory practice.”
Mr. Salmen is also senior vice president of GTrust Financial Partners, which manages about $400 million.
“We were shocked that the amendment was considered,” said Texas Securities Commissioner Denise Voigt Crawford, who is president of the North American Securities Administrators Association Inc.
David Tittsworth, executive director of the Investment Adviser Association, which opposes Finra regulation of advisers, said, “We're going to be working to try to convince people this is a very, very bad idea.”
The amendment, which was offered by the committee's ranking Republican member, Rep. Spencer Bachus, R-Ala., was passed with little debate at the end of the committee's consideration of the Investor Protection Act. No roll call vote was requested.
The full bill, which also would establish a single fiduciary standard for advisers and brokers providing personalized investment advice to retail clients, is expected to be approved by the committee Wednesday and will then go to the full House for approval.
The SEC and state regulators should retain control of all investment adviser regulation, Ms. Crawford said.
“Government is the best regulator because it is accountable to the public as opposed to a self-regulatory organization that is accountable to its members,” she said.
Mr. Bachus said the amendment is necessary because it would increase the number of investment advisory firms inspected each year.
Currently, the SEC each year examines only about 9% of the advisory firms under its auspices.
Finra has pushed to take over regulation of investment advisers, arguing that it has the resources to inspect 55% of the brokerage firms under its purview. Financial planning groups have opposed that idea.
“The disparity in regulatory regimes between broker-dealers and investment advisers leaves investors without a critical layer of protection,” said Nancy Condon, a Finra spokeswoman. “We support Congress closing the regulatory gap.”
Opponents of the provision are now scrambling to figure out how to defeat it. Before the voice vote, Rep. Barney Frank, D-Mass., the committee chairman, said he opposed the provision, though he did not call for a roll call, according to published reports.
“What we've got to do is try to get it stripped out of the bill, if not on the House floor then the Senate so it's not in the conference report,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
Ms. Roper held out hope that Mr. Frank would work against the provision when a conference committee were convened to work out final legislation between the House and the Senate. Mr. Frank would lead the House delegation to the committee.
Another provision in the bill would allow the SEC to collect fees from advisory firms to help recover the cost of inspections and examinations. It also contains a provision that would raise the asset threshold that would put advisory firms under SEC regulation to $100 million.
That would move about 4,000 advisory firms to state regulation, for a total of about 19,000. Only about 7,000 of the largest advisory firms would remain under SEC oversight.
In addition, the bill would double the budget authorization for the SEC over the next five years to about $2.25 billion.
E-mail Sara Hansard at [email protected].
