SEC Funding Boost ‘Not Going to Happen’: SRO Bill Co-Sponsor

Those testifying against an SRO were John Morgan, Securities Commissioner of Texas, on behalf of the North American Securities Administrators Association (NASAA), and David Tittsworth, executive director of the Investment Adviser Association (IAA).

Morgan told lawmakers that state securities regulators were “extremely concerned” about the impact Bachus’ bill would have on state-registered advisors and the clients they serve. “Above and beyond NASAA’s concerns with the SRO model and its application to investment advisor regulation, state securities regulators are adamantly opposed to HR 4624 because we believe it would subordinate state regulators to an SRO [and] impose redundant regulation and new costs on small and mid-size investment advisors that are impossible to justify.”

In a retort to a statement made that the bill would not create a new regulator for state-registered advisors, Morgan stated: “You are creating a new regulator for the states and we need to be excluded from this” bill.

Tittsworth added that “All state registered advisors would have to belong to an SRO” under Bachus’ bill.

In his testimony, Tittsworth told lawmakers that the “substantial drawbacks to an SRO significantly outweigh any potential benefits.” The drawbacks, he said, “include minimal transparency and accountability, insufficient oversight by the SEC and Congress, conflicts of interest, excessive costs, and the lack of meaningful due process protections and cost-benefit analysis restraints.”

He also said that H.R. 4624 “unfairly targets” small businesses. “Because of exemptions in the bill, smaller advisers are singled out for additional regulation and costs. The substantial costs and bureaucracy of an additional, unnecessary layer of SRO regulation and oversight of advisory firms would have a significant adverse impact on small businesses and job creation.”

Helck with Raymond James, who testified on behalf of SIFMA, stated, however, that the bill “will result in enhanced oversight of retail investment advisors and thereby better serve and protect individual clients.” The bill’s purpose, he said, “is not to foist new regulatory oversight on retail investment advisors, but to restore the oversight that is already supposed to be happening—but is not—while relieving pressure on the limited examination resources” of the SEC.

Helck said the term “SRO” in the “context of the securities industry” is a misnomer, stating that with an oversight body for advisors “We are not talking about ‘self’ regulation. We are not asking an industry to police itself. After many decades of legislation, oversight and regulation, regulatory organizations like FINRA are not controlled, or unduly influenced, by the industry they regulate.”

On the contrary, he continued, “today, regulatory organizations like FINRA are widely viewed and respected as independent, self-funded organizations whose priority is to protect investors.” As recently as 2010, he said, “Congress recognized this shift when it designated the Municipal Securities Rulemaking Board (MSRB) as the regulatory authority to carry out expanded oversight of the municipal marketplace, and remodeled the MSRB’s Board of Directors after FINRA’s as a majority public board, in order to better protect market participants and the public.”

SEC Chairwoman Mary Schapiro told AdvisorOne in a recent interview that oversight of the municipal securities markets is taking up a lot of the commission’s time. With a lack of funding and more duties under Dodd-Frank, questions remain as to whether the SEC would be able to adequately police FINRA if it became the SRO for advisors.

Ketchum with FINRA stated that “no one involved in regulating securities and protecting investors can be satisfied with [the current SEC] system where only 8% of regulated firms are examined each year. It is completely unacceptable and represents a major gap in investor protection.”

For now, the SRO debate continues. All those who oppose an SRO also agree that a boost in advisor exams must occur. The question that will continue to be debated is exactly how to do this.