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 that the Securities and Exchange Commission (SEC) would receive a boost in funding in order to thwart an SRO.
During a hearing on June 6 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 said, “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.
Supporters noted that the bill is a “good starting point” in addressing the gap in regulation.
John Morgan, securities commissioner of Texas, speaking on behalf of the North American Securities Administrators Association (NASAA), 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 H.R. 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 his testimony, David Tittsworth, executive director of the Investment Adviser Association, 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.”
Chet Helck, CEO of the Global Private Client Group for Raymond James, who testified on behalf of SIFMA, said 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, “regulatory organizations like FINRA are widely viewed and respected as independent, self-funded organizations whose priority is to protect investors.”
Richard Ketchum, chairman and CEO of 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.