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Hearing Set on SRO Proposal

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The House Financial Services Committee will hold a hearing on either June 6 or 7 on proposed legislation that would establish a self-regulatory organization (SRO) for investment advisors.

The legislation is being pushed by Rep. Spencer Bachus, R-Ala., chairman of the committee. According to Investment News, a markup of the bill by the committee is likely by the end of June.

He and Rep. Carolyn McCarthy, D-N.Y., are sponsoring the bill.

The bill is likely to be reported out by the Financial Services Committee, but unlikely to win support in the Senate even though it may be approved by the full House as well.

In announcing that he was introducing the bill, Bachus said that 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,” Bachus said.

“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 National Association of Insurance and Financial Advisors (NAIFA) is a strong supporter of the bill, which presumes that the Financial Industry Regulatory Authority (FINRA) would be a SRO, and conduct the examinations in lieu of the current SEC oversight.

NAIFA president Robert Miller argues that the SEC examines nine percent of investment advisers each year. In comparison, he said in an April statement, 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.

NAIFA has advocated that Congress authorize FINRA to become the self-regulatory organization, subject to appropriate SEC supervision, of all SEC-registered investment advisers.

But there is opposition.

This includes the North American Securities Administrators Association (NASAA). At a recent conference, Jack Herstein, assistant director of the Nebraska Department of Banking and Finance and president of the NASAA, called the Bachus bill “overreaching.”

 “The states have a sovereign obligation to provide oversight. State-registered [investment advisers] should be exempt from the bill.”

For example, Herstein said the legislation would usurp state authority over advisors with less than $100 million in assets under management.

At the same time, the Boston Consulting Group in December did an analysis cited by opponents which estimated that set-up costs alone for a new SRO would be in the $255 million to $310 million range.

And an analysis prepared by the law firm Jorden Burt cited by critics said 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.” 

Correction: The original version of this story mistakenly cited Rep. Carolyn Maloney as a sponsor of the bill. As stated above, Rep. Carolyn McCarthy, D-N.Y., is a co-sponsor of the bill.


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