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.
The House Financial Services Committee on Thursday released a draft bill that would establish one or more self-regulatory organizations (SRO) to oversee investment advisors. Washington insiders expected the committee to release the draft legislation after its Sept. 13 hearing on the issue.
With the exception of the Financial Services Institute (FSI), industry trade groups were quick to oppose the draft bill, which was introduced by House Financial Services Committee Chairman Spencer Bachus, R-Ala., and which would amend the Investment Advisers Act of 1940 to provide for the registration and oversight of national investment advisor associations, i.e., SROs. The draft states that advisors would have to be members of the SRO, which would report to the Securities and Exchange Commission (SEC).
Blaine Aikin, CEO of fi360, said in statement that “in general, fi360 opposes the bill and still believes that funding the SEC is the right direction for oversight” of advisors. If there is bright spot in the draft bill, he continued, “it is that the proposed bill calls for one or more SROs, rather than the alternative of a single SRO, FINRA,” the Financial Industry Regulatory Authority. However, he said, “at a minimum, before something like this legislation is enacted, we would hope that Congress would walk its own talk and call on the GAO to perform a cost-benefit analysis.”
Marilyn Mohrman-Gillis (left), managing director, public policy for the Certified Financial Planner (CFP) Board of Standards, told AdvisorOne on Thursday that the authorization of an SRO to oversee advisors doesn’t address the real problem, which is how to increase investment advisor exams. “We don’t believe that creating this whole new bureaucracy” via an SRO addresses the advisor examination issue in a cost-effective manner, she says. Advisor oversight should “remain at the SEC, and the [agency] can increase its examinations of advisors with a revenue increase—and that can be done off budget.”
David Tittsworth, executive director of the Investment Adviser Association (IAA), says that IAA “respectfully disagrees with the approach suggested in the discussion draft.” IAA, he says, believes “that the SRO model has demonstrated a lack of accountability and transparency, unnecessary and excessive costs, a poor track record, and, in FINRA’s case, a bias favoring the broker-dealer model.” He went on to say that IAA would “prefer the user fee option [to fund advisor exams] outlined in the SEC staff report issued in January under Section 914 of the Dodd-Frank Act.”
Dale Brown (left), president and CEO of FSI, says that "due to an enormous gap in the supervision of retail investment advisors, hard-working Americans are forced to become financial services regulatory experts, simply in order to feel confident that the person they turn to for financial advice has their best interests in mind.”
The current regulatory disparity between brokers and advisors, "not only puts investors at great risk, it undermines investor confidence, which in turn jeopardizes not only the investment goals of millions of Americans but also the economy at large.”
Since the start of the legislative process that resulted in Dodd-Frank, Brown continued, “FSI has urged Congress to adopt legislation that would allow the SEC to close the regulatory gap by approving an SRO for retail investment advisers.” If adopted, he said, “this legislation would accomplish that goal and bring about significant improvements in investor protection and a balanced playing field for all financial advisors.”
Industry trade groups are busy putting the finishing touches on the testimony they plan to deliver at the Sept. 13 hearing, which is entitled “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight”; The hearing will also focus on another important issue for advisors—fiduciary duty.
While the Capital Markets Subcommittee has yet to release an official list of those who will be testifying on Sept. 13, Tittsworth and Brown will be among those delivering testimony. FINRA CEO Rick Ketchum will also be on hand—beating the drum for FINRA to be the SRO for advisors.