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September 13, 2011 at 05:17 AM
The reregulation of financial advisors under the Dodd-Frank Act entered a new phase with last Thursday’s release of a draft SRO bill by the Honorable Spencer Bachus, chairman of the House Committee on Financial Services, and the announcement of hearings on that draft legislation scheduled for Tuesday.
Unfortunately, in his bill—called The Investment Adviser Oversight Act of 2011—Rep. Bachus (R-AL) has chosen to ignore the consumer-protecting Dodd-Frank directive to create a fiduciary standard for brokers, and focus instead on securities industry turf-protecting clause to “harmonize” broker and advisor regulation. The good news is that the Republican schizophrenia to protect small businesses from government regulation, while at the same time increasing investment advisor regulation, may just offer enough of an opening to allow for the survival of independent financial advice.
To help me sort out the proposed Adviser Oversight Act, I called Kristina Fausti, director of legal and regulatory affairs at fi360, and as a former staff attorney at the SEC, provides invaluable insight into the workings in Washington, D.C. Kristina pointed out that the good news and bad news about Bachus’ draft bill is that it is largely modeled on the portion of the Securities and Exchange Act of 1934 which authorized the creation of an SRO for the brokerage industry (a role filled by the NASD, the predecessor of FINRA). “While I’d prefer to see the SEC continue to regulate RIAs,” she said, “the good news is that the regulatory model in the Exchange Act is one we already know and understand.”
The bad news is that the NASD/FINRA model is designed for regulating brokerage firms, which perform multiple functions including underwriting, trading and, most important, retail sales of securities. This model is built around rules governing fair dealing between two equal parties in a commercial sales transaction. And it differs substantially from investment advisory relationships regulated under the Investment Advisers Act of 1940, which provides for consumer-protecting standards of conduct for professional advisors who, with greater knowledge and experience, have a substantial advantage over their clients.
