More On Legal & Compliancefrom The Advisor's Professional Library
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- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Growing increasingly frustrated with the lack of funding given to the Securities and Exchange Commission (SEC) by Congress, the Consumer Federation of America (CFA) has reversed its opposition to a self-regulatory organization (SRO) for advisors.
“Having spent the better part of two decades arguing for various approaches to increase SEC resources for investment adviser oversight with nothing to show for our efforts, we have been forced to reassess our opposition to the SRO approach,” said Barbara Roper (left), director of investor protection at CFA, in testimony before the Senate Banking Committee on Wednesday. “Specifically, we have concluded that a properly structured SRO proposal would be a significant improvement over the status quo.”
Roper told Congress that CFA has been “categorically opposed” to an SRO for advisors, “particularly one dominated by broker-dealer interests” like the Financial Industry Regulatory Authority (FINRA), “and particularly if that SRO were given rule-making authority.”
However, Roper told AdvisorOne that if Congress chooses to go the SRO route, FINRA “is almost certain to play some role, at least with regard to its members who are dual registrants.” The question then becomes, she said, “whether it is the sole SRO or whether others step in to fill this function for independent advisers.”
Despite the turnaround on an SRO, Roper told lawmakers that CFA, like other advisory groups, continues to maintain that “the user-fee approach” outlined in the SEC report mandated under Section 914 of Dodd-Frank “offers the best option for funding enhanced [advisor] inspections in a way that promotes investor protection while minimizing added costs to industry.”
The Financial Services Institute (FSI) has been the only advisory group pushing for an SRO for advisors. Dale Brown (left), FSI’s president and CEO, said in a statement that he’s “pleased that CFA agrees” with FSI “that the best way to protect investors is to ensure advisors have the proper oversight” via an SRO.
Roper went on to tell lawmakers that the SEC study on the need for assistance in examining and overseeing advisors “does an excellent job, in our view, of laying out the issues that would need to be addressed if Congress were to pursue this approach.”
In developing an SRO proposal “that adequately protects investor interests while avoiding imposing undue costs on small advisors,” Roper said lawmakers should consider the following questions:
- How should such an approach be structured in light of the diversity in the investment adviser community?
- How can the risks of industry capture be avoided?
- What are the implications of strong industry opposition to such an approach?
- What would the costs of effective SRO oversight be, and how would they be borne by the many small investment adviser firms?
- What resources would the SEC need in order to provide effective oversight of any such SRO or SROs to which this responsibility might be delegated?
- Should an SRO be an inspection-only SRO, or should it also have broader rule-making authority?
- What entity (or entities) is best suited to this task?