In FSI Testimony Before Congress on SRO, a Call for a Level Regulatory Field

We know that both policymakers and our members share a common goal: to secure the American public’s financial future. We believe this can best be accomplished by improving the public’s confidence in our financial markets and the financial professionals who work in those markets… 

…it is in the best interest of both individual investors and the economy as a whole if our system of regulatory supervision protects and encourages those who seek out this professional advice. We support H.R. 4624 because it will create a structure that enhances trust and confidence in the supervisory system… 

…In your letter of invitation, Mr. Chairman, you asked specifically whether the current oversight and inspection of registered advisers is sufficient. FSI believes that it is most emphatically not….

Broker-dealers continue to face routine examinations on a regular and consistent basis; in 2011, FINRA examined 58% of the broker-dealer firms it is responsible for regulating. Unfortunately, investment adviser firms are not subject to routine examination. The SEC recently testified before Congress that it had examined only 8% of registered investment advisers in 2011—an average exam cycle of once every 13 years. Even more troubling, the SEC told Congress that nearly 40 percent of advisers registered with the SEC have never been examined—not once…

 The risks inherent in the current regulatory system have become only too clear in recent years. Bernard Madoff was able to operate his Ponzi scheme through an unsupervised investment adviser. In addition, many “mini-Madoffs” have been flushed out by the recent recession. Frauds such as Madoff’s do immeasurable damage to confidence in our capital markets, with a ripple effect that goes far beyond the individual investors impacted. A retail investor may look at the Madoff case and believe him or herself better off without professional advice or decide that the financial markets are rigged for the benefit of a few. These individuals will not only expose themselves to greater risk of failing to achieve their financial goals, but will also hurt our national economy by keeping their assets on the sidelines… 

The investing public deserves better protection than our current regulatory system provides. They deserve more robust oversight and supervision of the professionals to whom they have entrusted their hard-earned money. The creation of an independent regulator under SEC oversight will help close this unacceptable regulatory gap, by assuring regular examinations for a sector of the industry that currently has almost no meaningful oversight…

Nearly 4 years since Bernie Madoff’s investment adviser fraud was exposed, the safe harbor in which he operated remains open to others to exploit. Passage of the Investment Adviser Oversight Act of 2012 would bring this unconscionable situation to an end. Congress has shown, in adopting the Dodd-Frank Act and introducing H.R. 4624, that it understands the importance of maintaining and enhancing individual investors’ confidence in our financial system and in the investment advice they receive. The coordinated system of enhanced supervisory oversight provided by the regulatory system proposed by the bill will offer investors an additional measure of confidence, and will ensure that all Americans have access to competent, affordable financial advice, products and services with the highest level of consumer protection.

Main Street investors deserve an efficient, effective and unified system of oversight, whether they are working with investment advisers or broker-dealers: a smarter system that ensures true consumer protection.

H.R. 4624 will help to create such a system. We commend you, Chairman Bachus, and you, Rep. (Carolyn) McCarthy, for taking this important bipartisan step toward better regulation and supervision, and we urge you to pass this bill as quickly as possible. 

(The above is an abridged version of Brown’s testimony before the House Financial Services Committee on June 6, 2012. Please follow this link to read the entire testimony.–Ed.)