As legislation that would shift investment adviser regulation from the SEC to an industry-run group heads toward a committee vote, another leading Democrat on the panel has come out in opposition to the measure.
Rep. Maxine Waters, D-Calif., the second-highest ranking Democrat on the House Financial Services Committee, said that she favors keeping adviser oversight with the Securities and Exchange Commission.
“My optimal solution is to fund a robust SEC that can carry out the mandate we entrusted it with,” Ms. Waters told the North American Securities Administrators Association public-policy conference Monday.
On April 25, House Financial Services Committee Chairman Spencer Bachus, R-Ala., introduced a
bill that would authorize one or more self-regulatory organizations for investment advisers. Any adviser with retail clients would have to join one of the SROs and pay membership dues.
The measure responds to a January 2011 SEC study mandated by the Dodd-Frank financial reform law. That study showed that the SEC examines annually only about 8% of the approximately 12,000 advisers registered with the agency.
The report recommended three ways to increase adviser examinations: establish an SRO, allow the SEC to charge user fees for examinations or extend the reach of the
Financial Industry Regulatory Authority Inc., the broker-dealer SRO, to include brokers dually registered as advisers. Congress would have to approve any of the options.
Mr. Bachus said his bill would increase investor protection by subjecting advisers to more-frequent examinations. He emphasized bipartisan support for his bill by introducing it with Democratic Rep. Carolyn McCarthy, D-N.Y. Since then, however, Barney Frank, D-Mass., ranking member of the House Financial Services Committee, and now Ms. Waters have
come out against the bill.
Investment advisers fiercely resist the creation of an SRO, especially if Finra fills the role. They say it would be a
costly layer of additional rules by a regulator that doesn't understand the fiduciary-duty requirement that governs adviser interactions with clients. Brokers adhere to a less stringent suitability standard.
In talking with lawmakers, adviser lobbying organizations have been brandishing a Boston Consulting Group study that asserts that an SRO would cost twice as much as bolstering SEC oversight. Finra is now circulating its own cost calculation that is far lower than the consultant's estimate, however.
Adviser advocates have an ally in Ms. Waters, who supports the SEC user fee approach.
“I believe this option would be more cost effective for the investment adviser industry,” she said. “A reasonable user fee assessed by the SEC would be, by most accounts, substantially less than one assessed by any SRO.”
Ms. Waters also echoed a SRO criticism voiced by state regulators. “I'm concerned the bill would move to nationalize small- and midsize-investment-adviser regulation,” Ms. Waters said.
Jack Herstein, NASAA's president and assistant director of the Nebraska Department of Banking and Finance, slammed a Bachus bill provision that would require all investment advisers with retail clients — including those with less than $100 million in assets under management, who will soon be overseen by the states — to register with a self-regulatory organization.
The bill specifies that the SRO would leave regulation of the advisers to the states as long as the states examined them at least once every four years. But Mr. Herstein said that that still would leave a substantial burden on the advisers, who would have to continue to pay dues to the SRO.
“Even if the states do all the exams, the way [the bill] is currently written, the state investment advisers still have to join the SRO,” Mr. Herstein told reporters covering the NASAA conference. “That's a job-killing bill, because in most cases, most of the state investment advisers … are one- or two-man shops.”
Mr. Herstein also is not thrilled by the idea of state regulators reporting to an SRO — a key stipulation in the Bachus bill. He said there's no evidence that states have been deficient in overseeing advisers.
“If the purpose of the bill is basically to make sure that investment advisers are examined routinely, we agree with the congressman,” Mr. Herstein said. “However, states are not part of the problem. States don't need to be in [the bill].”
Observers expect the House Financial Services Committee to vote on the SRO bill after Congress returns from its Memorial Day recess.
