House Financial Services Committee Chairman Spencer Bachus reintroduced on Wednesday his draft bill calling for a self-regulatory organization (SRO) for advisors—one week after industry sources told AdvisorOne that an SRO bill was imminent.
On the same day, the House Financial Services Committee’s Capital Market Subcommittee grilled Securities and Exchange Commission (SEC) chairwoman Mary Schapiro at an oversight hearing. At the hearing, Schapiro said in response to a question from one lawmaker on her views of an SRO, that she spent 12 years at an SRO, and that “at a time when there are extremely limited resources in the federal government, the need to leverage an SRO is critical.”
Bachus said that his draft bill, which he introduced with Rep. Carolyn McCarthy, D-N.Y., is in response to an SEC study that revealed the agency lacks resources to adequately examine the nation’s nearly 12,000 registered advisors. As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended—as one of three options–a self-regulatory organization for Congress to consider as it looks for ways to help the agency monitor the industry.
The Bachus-McCarthy bill, the Investment Adviser Oversight Act of 2012, would authorize “one or more self-regulatory organizations (SROs) for investment advisors funded by membership fees.”
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A vote on the bill could occur in the committee as early as next month.
The two lawmakers noted in introducing the proposed legislation that investment advisors and broker-dealers “often provide indistinguishable services to retail customers, yet only 8% of investment advisors were examined by the SEC in 2011 compared to 58% of broker-dealers.
Said Bachus: “The average SEC-registered investment advisor can expect to be examined less than once every 11 years. That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable. Bad actors will naturally flow to the place where they are least likely to be examined. Therefore, it is essential that we augment and supplement the SEC’s oversight to dramatically increase the examination rate for investment advisers with retail customers.”
The legislation would amend the Investment Advisers Act of 1940 to provide for the creation of National Investment Adviser Associations (NIAAs), registered with and overseen by the SEC. Investment advisors that conduct business with retail customers would have to become members of a registered NIAA, and the SEC would have the authority to approve the registration of any NIAA.
The proposal also recognizes the authority given to the states over small investment advisors in Title IV of the Dodd-Frank Act by preserving state authority over investment advisors with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.