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POGO Assails House Financial Services Committee's SRO Bill

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A non-partisan government reform group is assailing a House legislative proposal that would shift oversight of investment advisors to a self-regulatory organization, most likely the Financial Industry Regulatory Authority.

In a letter to the chairman and ranking minority member of the House Financial Services Committee, the Project On Government Oversight (POGO) raised “serious concerns” about H.R. 4624, a bill that would authorize one or more SROs to oversee the investment advisor industry.

The legislation is sponsored by Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, and Rep. Carolyn McCarthy, D-N.Y. The FSC will hold a hearing on the bill June 6, and a markup of the legislation is tentatively scheduled for June 28.

But POGO said that, like several other groups, it opposes the legislation, especially because the most likely SRO to which oversight of investment advisors would be shifted from the Securities and Exchange Commission would be FINRA.

In a letter to Bachus, and Rep. Barney Frank, D-Mass., the ranking minority member of the House FSC, POGO officials said that FINRA’s regulatory effectiveness is undermined “by its inherent conflicts of interest, its lack of transparency and accountability, its lobbying expenditures, and its executive compensation packages, among other issues.

The letter also cited a recent analysis by the Boston Consulting Group, which, POGO officials said, “underscored the costs associated with authorizing FINRA or a new SRO to regulate investment advisers.”

The letter was signed by Angela Canterbury, POGO director of public policy, and Michael Smallberg, investigator.

The letter suggests that, instead of delegating additional authority to private self-regulatory groups, Congress should reduce the SEC’s current reliance on FINRA and other SROs, work to improve FINRA’s transparency and accountability policies, and provide sufficient funding to the SEC to ensure that it is able to carry out its important regulatory duties on its own.

“If we have learned anything from the financial crisis of the past few years, it is that inadequate federal regulation of the financial industry leads to excessive risk and instability in our economy,” Canterbury and Smallberg said.

One of its concerns about FINRA is that the “inevitable conflicts of interest between an investment adviser SRO and its members will not only limit the SRO’s actual effectiveness, but also damage the public’s confidence in the organization’s enforcement activities, thereby further limiting its regulatory impact.”

The bill is likely to be reported out by the Financial Services Committee, but unlikely to win support in the Senate, 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.

The National Association of Insurance and Financial Advisors is a strong supporter of the bill.

NAIFA President Robert Miller argues that the SEC examines 9% of investment advisers each year. In comparison, he said in an April statement, FINRA examines 55% of broker-dealers every year, and all registered representatives are subject to annual compliance reviews by their broker-dealers.

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


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