On April 25, 2012, Rep. Spencer Bachus (R-Ala.) and Rep. Carolyn McCarthy (D-N.Y.) introduced HR 4624, the “Investment Adviser Oversight Act of 2012.” The bill would authorize the SEC to designate one or more “national investment adviser associations” that would have broad authority to regulate and oversee thousands of investment advisory firms. Here are some questions—and answers—about this important legislation.
Q. Does HR 4624 specifically name FINRA as the investment adviser SRO?
A. No, but let’s be real: FINRA is the only viable option that has been identified. Rep. Bachus clearly contemplates that the SRO will be an offshoot of FINRA. FINRA is lobbying heavily in favor of the legislation in an effort to expand its revenue base and jurisdictional turf.
An economic analysis prepared by the Boston Consulting Group in December 2011 estimates set-up costs alone for a new SRO would be in the $255 million to $310 million range. An analysis of the bill prepared by the law firm Jorden Burt states that, “as a practical matter…the broad functions…that this bill envisions for an SRO will probably increase the resources required and discourage non-FINRA-related applicants for SRO status.” The bottom line is that no realistic alternative to FINRA exists. In fact, the 38-page bill largely mirrors the 1938 law that spawned the creation of NASD (which merged with the regulatory arm of NYSE in 2007 to become FINRA).
Q. How will the SRO fund its operations?
A. Through membership and other fees paid to the SRO. Trying to get a handle on all of FINRA’s current fees to its broker-dealer members is no easy task, and it’s a moving target. Last month, FINRA’s CEO Rick Ketchum notified his members that the “broader economic downturn continues to affect trading volumes and industry revenues, which in turn has led to a decrease in Finra’s revenues and resulted in a significant loss for fiscal year 2011.”
As a result, FINRA is “proposing adjustments to a number of user-based fees,” which will include advertising reviews, corporate financing, new-member applications, a 25% increase in the trading activity fee and an unspecified “regressive tiered rate” for branch office assessments. Under HR 4624, the SRO would have broad authority to set the fees its members would have to pay to finance the SRO’s operations. My guess is that, at first, FINRA’s fees for an investment advisor SRO will be relatively modest. But over time, one should realistically expect the fees to go up and up…
Q. Which investment advisory firms will have to belong to the SRO?