As Treasury Secretary Timothy Geithner laid out the Obama Administration’s plans for financial services reform before the House Financial Services Committee March 26, SEC Chairman Mary Schapiro told members of the Senate Banking Committee the same day that the Commission is considering harmonizing the rules that govern broker/dealers and investment advisors. “We are studying whether to recommend legislation to break down the statutory barriers that require a different regulatory regime for investment advisors and broker/dealers, even though the services they provide often are virtually identical from the investor’s perspective,” Schapiro told members of the Senate Banking, Housing, and Urban Affairs Committee. Schapiro also said she plans to ask lawmakers to craft legislation that would require investment advisors to hedge funds, as well as possibly hedge funds themselves, to register with the Commission, and that the SEC should have the power to regulate credit default swaps and municipal bonds.
In her prepared testimony, Schapiro also told Congress that SEC staff will recommend a proposed rule that would require certain investment advisors to have third-party compliance audits. “To ensure that all broker/dealers and investment advisors with custody of investor funds carefully review controls for the safekeeping of those assets,” she said, “I expect the staff to recommend that the Commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets.” Schapiro said the list of certifying firms would be available on the SEC’s Web site “so that investors can check on their own financial intermediary.”
Senator Christopher Dodd (D-Connecticut), chairman of the committee, asked Schapiro what role a systemic risk regulator should play. Schapiro responded that while the “devil is in the details,” Congress should not create a “monolithic” entity that usurps the powers of other regulators like the SEC. She said that any regulatory reform should ensure that the SEC remains an independent agency.
A “Broad” Review of the SEC’s Structure
Senator Richard Shelby (R-Alabama), ranking member of the committee, queried Schapiro about the SEC’s examination function creating a “dangerous wall” between the Commission’s examiners and policymakers. Schapiro responded that reviewing the structure of the SEC “broadly” is high on her list of priorities, which includes looking at the structure of the Office of Compliance Inspections and Examinations (OCIE). She said the agency must have an examination staff that can “do the job” and must be “linked back to the policymakers in the organization.”
Senator Chuck Schumer (D-New York) told Schapiro that members of Congress are now considering measures to increase the SEC’s enforcement budget, and asked Schapiro how she would use these funds to beef up the enforcement division. In response, Schapiro reminded committee members that a new enforcement director would be starting at the Commission on March 30, and said that new funds would help the agency pinpoint and settle the most important cases quickly. She characterized the agency’s technology as “light years behind,” so new funds would help enhance technology used by the SEC’s exam teams. She claimed that while the agency has enhanced its internal and external training programs, the new funds would help in this endeavor.
As for the need for an SRO for advisors, Schapiro told the Senate committee that the SEC is still studying this option. The Madoff scandal, she said, “points out to me that we do have gaps in regulatory regimes…with different standards that govern investment advisors and broker/dealers.” These gaps, she continued, need to be filled to protect investors.
FINRA and IAA Weigh In
Richard Ketchum, the new CEO of FINRA, told the Senate Banking committee members in his testimony that while it’s ultimately up to Congress and the SEC to decide whether FINRA should become the SRO for advisors, he said he believes that “…FINRA is uniquely positioned from a regulatory standpoint to build an oversight program for investment advisors quickly and efficiently. We have a strong track record in our examination and enforcement oversight, as well as in our other core programs. Certainly in the registration area, with regard to investment advisors and mortgage brokers, we have two success stories of adapting our infrastructure to meet needs in areas beyond the realm of broker/dealers.”
David Tittsworth, executive director of the Investment Adviser Association (IAA), told Congress that IAA believes an SRO for investment advisors is unnecessary, and that rules for brokers and advisors should not be harmonized because they operate differently. Instead of establishing an SRO for advisors, Tittsworth recommended providing full funding for the SEC; increasing the $25 million threshold that divides state-registered and SEC-registered advisors; and improving the SEC’s inspection program to better leverage its current resources.