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Bill Introduced to Make FINRA Self-Regulating

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Legislation has been introduced that will lay the groundwork for the Financial Industry Regulator Authority to become a self-regulatory organization for investment advisers.

The bipartisan bill was introduced by Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, and Rep. Carolyn McCarthy, D-N.Y.

Industry officials said a vote on the bill could occur as early as next month.

The bill was introduced in the face of a study by the Boston Consulting Group and commissioned by advisory trade groups which found that creating an SRO would cost at least twice as much as providing the Securities and Exchange Commission with adequate funds to examine advisors.

The legislation has strong support from members of the National Association of Insurance and Financial Advisors and the Financial Services Institute.

According to NAIFA officials, the Securities and Exchange Commission only examines nine percent of investment advisers each year.

In comparison, according to NAIFA officials FINRA examines 55 percent of broker-dealers every year, and all registered representatives are subject to annual compliance reviews by their broker-dealers.

Approximately 33 percent of investment advisers have never undergone SEC examinations, NAIFA said.

“The Bachus-McCarthy legislation would provide an important consumer protection,” said NAIFA President Robert Miller. “Public faith in all financial professionals depends on intelligent regulation that provides appropriate oversight without creating overwhelming compliance burdens.”

Miller noted that having not examined a third of investment advisers has created a trust gap between consumers and the SEC.

“Hard-working American investors shouldn’t have to be regulatory experts to know whether their financial advisor is getting the proper oversight needed to ensure they’re protected,” FSI President & CEO Dale Brown said.

Brown said that from a business standpoint, retail investment advisers have an unfair advantage over independent broker-dealers, who are examined by FINRA every two years. It’s time to protect investors and level the play field.”

Brown cited recent FSI poll of over 2,000 financial advisors showed roughly 75 percent of them favored an SRO for retail investment advisors

NAIFA’s Miller wants Congress to authorize FINRA to become the self-regulatory organization, subject to appropriate SEC supervision, of all SEC-registered investment advisers.

“Just over 25 percent of NAIFA members are investment advisers, and 99 percent of these are also registered reps subject to FINRA oversight,” Miller said.

The Financial Planning Coalition released the following statement in response to the introduction of the Investment Adviser Act of 2012, sponsored by Financial Services Committee Chairman Spencer Bachus and Rep. Carolyn McCarthy:  

“While we agree with Chairman Bachus and Representative McCarthy that better oversight of investment advisers is needed, we oppose the legislation introduced in the House Financial Services Committee.   As a recent Boston Consulting Group study found, outsourcing SEC oversight to a new SRO would be twice as expensive as directing adequate resources to the current SEC oversight program. 

“Building on the SEC’s existing infrastructure and experience is a better option than creating an added layer of regulation, and could be accomplished more quickly and effectively, and at far less cost,” the statement adds. “Creating an SRO for investment advisers would unnecessarily burden small business owners with additional costs.

The statement goes on to note that investment advisers are overwhelmingly opposed to a FINRA SRO. More than 80% of advisers surveyed said they would prefer continued SEC oversight to being regulated by FINRA, an SRO for broker-dealers.

“We look forward to working with the Chairman and the Committee to find an effective way to address the oversight issue without unduly burdening investment advisers,” the statement says. “More frequent examinations will help weed out bad actors who would harm investors and undermine the trust that advisers work so hard to earn.”


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