More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
Industry trade groups and consumer advocates opposed to House Financial Services Committee Chairman Spencer Bachus’ bill calling for a self-regulatory organization (SRO) to oversee advisors had their hopes quashed on Wednesday that the Securities and Exchange Commission (SEC) would receive a boost in funding in order to thwart an SRO.
During a hearing on Wednesday to discuss Bachus’ bill, H.R. 4624, the co-sponsor of the bill, Rep. Carolyn McCarthy, D-N.Y., stated frankly: “Would I like to get more money for the SEC? Yes, I would. But we are not going to get the money for the SEC; it’s not going to happen.”
However, Rep. Maxine Waters, D-Calif., stated at the hearing that she is drafting legislation that would allow the SEC to collect user fees to help fund advisor exams.
A day before the SRO hearing, the House Financial Services General Government Appropriations Subcommittee allotted $1.37 billion to the SEC for fiscal year 2013—$195 million below President Obama’s request—and an amount that industry officials agree will starve the SEC of the necessary funding to boost oversight of advisors.
The SEC requested $1.57 billion for fiscal 2013, an increase of $245 million above the agency’s fiscal 2012 appropriation.
Rep. Barney Frank, D-Mass., ranking member on the Committee, argued that Congress "can afford to increase the relatively small amount" of funding the SEC asked for.
However, Bachus countered that while some have argued more SEC funding “is the answer” to increasing advisor exams, the “SEC itself has admitted that even if the agency receives the full amount” it requested in FY 2013, the securities regulator “would be able to examine only one in 10” advisors.
While the bulk of those testifying were in favor of Bachus’ bill, the Investment Adviser Oversight Act of 2012, Bachus stated during his opening remarks that he “stands ready to work with anyone who has an idea on how to improve” the bill. The “only goal” of the bipartisan legislation “is to deter bad actors and help protect American investors,” he said. “I see no way to do that without timely examinations.”
Bachus went on to say that “We want to do what’s right. We don’t want to unnecessarily burden advisors, but at the same time they need to be examined.” Addressing lawmakers and those testifying, Bachus added that “We are all open to seeing that [an SRO is] not overbearing. This is not a markup, this is a hearing.”
A markup on the bill was expected to occur on June 28, but industry officials attending the hearing speculated that date could be pushed off until fall.
The bulk of those testifying were in favor of Bachus’ bill, which would authorize one or more SROs to oversee advisors—with all endorsing the Financial Industry Regulatory Authority (FINRA) as the preferred candidate. The supporters noted that the bill is a “good starting point” in addressing the gap in regulation that currently exists in advisor oversight.
Those supporting Bachus’ bill, the Investment Adviser Oversight Act of 2012, were: Dale Brown, president and CEO of the Financial Services Institute; Thomas Currey, past president of the National Association of Insurance and Financial Advisors (NAIFA); Chet Helck, CEO of the Global Private Client Group for Raymond James, who testified on behalf of the Securities Industry and Financial Markets Association (SIFMA); and Richard Ketchum, chairman and CEO of FINRA.
Those testifying against an SRO were John Morgan, Securities Commissioner of Texas, on behalf of the North American Securities Administrators Association (NASAA), and David Tittsworth, executive director of the Investment Adviser Association (IAA).
Morgan told lawmakers that state securities regulators were “extremely concerned” about the impact Bachus’ bill would have on state-registered advisors and the clients they serve. “Above and beyond NASAA’s concerns with the SRO model and its application to investment advisor regulation, state securities regulators are adamantly opposed to HR 4624 because we believe it would subordinate state regulators to an SRO [and] impose redundant regulation and new costs on small and mid-size investment advisors that are impossible to justify.”
In a retort to a statement made that the bill would not create a new regulator for state-registered advisors, Morgan stated: “You are creating a new regulator for the states and we need to be excluded from this” bill.
Tittsworth added that “All state registered advisors would have to belong to an SRO” under Bachus’ bill.
In his testimony, Tittsworth told lawmakers that the “substantial drawbacks to an SRO significantly outweigh any potential benefits.” The drawbacks, he said, “include minimal transparency and accountability, insufficient oversight by the SEC and Congress, conflicts of interest, excessive costs, and the lack of meaningful due process protections and cost-benefit analysis restraints.”
He also said that H.R. 4624 “unfairly targets” small businesses. “Because of exemptions in the bill, smaller advisers are singled out for additional regulation and costs. The substantial costs and bureaucracy of an additional, unnecessary layer of SRO regulation and oversight of advisory firms would have a significant adverse impact on small businesses and job creation.”
Helck with Raymond James, who testified on behalf of SIFMA, stated, however, that the bill “will result in enhanced oversight of retail investment advisors and thereby better serve and protect individual clients.” The bill’s purpose, he said, “is not to foist new regulatory oversight on retail investment advisors, but to restore the oversight that is already supposed to be happening—but is not—while relieving pressure on the limited examination resources” of the SEC.
Helck said the term “SRO” in the “context of the securities industry” is a misnomer, stating that with an oversight body for advisors “We are not talking about ‘self’ regulation. We are not asking an industry to police itself. After many decades of legislation, oversight and regulation, regulatory organizations like FINRA are not controlled, or unduly influenced, by the industry they regulate.”
On the contrary, he continued, “today, regulatory organizations like FINRA are widely viewed and respected as independent, self-funded organizations whose priority is to protect investors.” As recently as 2010, he said, “Congress recognized this shift when it designated the Municipal Securities Rulemaking Board (MSRB) as the regulatory authority to carry out expanded oversight of the municipal marketplace, and remodeled the MSRB’s Board of Directors after FINRA’s as a majority public board, in order to better protect market participants and the public.”
SEC Chairwoman Mary Schapiro told AdvisorOne in a recent interview that oversight of the municipal securities markets is taking up a lot of the commission’s time. With a lack of funding and more duties under Dodd-Frank, questions remain as to whether the SEC would be able to adequately police FINRA if it became the SRO for advisors.
Ketchum with FINRA stated that “no one involved in regulating securities and protecting investors can be satisfied with [the current SEC] system where only 8% of regulated firms are examined each year. It is completely unacceptable and represents a major gap in investor protection.”
For now, the SRO debate continues. All those who oppose an SRO also agree that a boost in advisor exams must occur. The question that will continue to be debated is exactly how to do this.