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October 01, 2011 at 08:00 PM
Lawmakers and industry officials debated the merits in mid-September of whether there should be a self-regulatory organization (SRO) for advisors, and at least one industry official says to expect SRO legislation from the House this fall.
At a hearing to discuss draft legislation introduced by House Financial Services Committee Chairman Spencer Bachus, R-Ala., calling for one or more SROs for advisors, Rick Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA), told lawmakers that FINRA stands ready to take on that role.
Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets Subcommittee, which held the hearing, also challenged the SEC’s decision to move forward with crafting a fiduciary standard for brokers without offering adequate cost-benefit analysis to support such a rule. While any rule proposal crafted by the SEC must include an economic analysis that gets issued for public comment, David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, said at the hearing that the “SEC can be taken to court if [the agency’s] cost-benefit analysis is not robust enough.”
Despite fiduciary critics, Securities and Exchange Commission (SEC) Chairman Mary Schapiro is moving ahead with crafting a fiduciary standard for brokers. The SEC lists among its planned activities under Section 913 of the Dodd-Frank Act from August to December “proposed rules, as may be appropriate,” regarding a fiduciary duty for brokers.
Bachus’ draft SRO bill, introduced on Sept. 8, 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 SEC. Duane Thompson, senior policy analyst for fi360, says that “it’s a safe bet” that an SRO bill will come out of the House this fall.
In testimony before the Capital Markets Subcommittee, Ketchum said that FINRA, as the advisor SRO, would establish “a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area.” What’s more, he pledged, “if FINRA becomes an SRO for investment advisers, we would implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business.”
Ketchum went on to say that given FINRA’s “experience in operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem.” While Bachus’ draft bill calls for one or more SROs, the only SRO option discussed at the hearing was FINRA.
Indeed, William Dwyer, chairman of the Financial Services Institute (FSI) and head of sales at LPL Financial Services, told lawmakers at the hearing that they should “quickly pass legislation to approve an SRO for advisors,” and that the SRO should be FINRA.
Tittsworth, however, stated IAA’s “strong” opposition to an SRO for the advisory profession—particularly FINRA—as “substantial drawbacks to an SRO outweigh any potential benefits.” These drawbacks, he said, include “insufficient transparency, accountability, and oversight by the SEC and Congress, due process issues in disciplinary proceedings, and the absence of any requirement for a cost-benefit analysis for proposed rules.”
