House Financial Services Chairman Spencer Bachus reintroduced in late April his draft bill calling for a self-regulatory organization (SRO) for advisors. The same day, the Financial Industry Regulatory Authority (FINRA), the potential lead candidate in assuming the SRO role, released its projections on the costs of examining advisors, which was far below projections released by the Boston Consulting Group (BCG).
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 an SRO for Congress to consider as it looks for ways to help the agency monitor the industry.
The Investment Adviser Oversight Act of 2012 would authorize “one or more self-regulatory organizations for investment advisors funded by membership fees.”
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: “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 create National Investment Adviser Associations (NIAAs), registered with and overseen by the SEC. Investment advisors who 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 preserves states’ authority granted in the Dodd-Frank Act over investment advisors with less than $100 million in assets under management, so long as the state conducts periodic on-site examinations.
Reactions to the proposal were swift and varied. David Tittsworth, executive director of the Investment Adviser Association (IAA), said that IAA “strongly opposes this ill-advised legislation that is intended to expand” FINRA’s jurisdiction. “Outsourcing the SEC’s critically important role in regulating and inspecting investment advisory firms is not the right solution, particularly when FINRA has demonstrated its lack of accountability, lack of transparency and poor track record.”
Dale Brown, president and CEO of the Financial Services Institute (FSI), said that from a business standpoint, “retail investment advisors 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 playing field.”