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SRO Hearing in the House

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Broad fissures within the investment advisory community over how the industry should be regulated going forward were exposed today at a House hearing.

The hearing before the House Financial Services Committee was on H.R. 4624, the Investment Adviser Oversight Act, a bill which would shift regulation of investment advisors to a self-regulatory-organization (SRO) rather than directly by the Securities and Exchange Commission.

The hearing also brought up a new issue, the terminology that should be used in describing the entity that would take over oversight of investment advisors from the SEC.

In his testimony, Dale Brown, president & CEO of the Financial Services Institute, said he would not use the term SRO, but would instead say “independent regulator.”

That’s because there has been criticism of the independence and governance of the Financial Industry Regulatory Agency (FINRA), the most likely agency that would house the proposed new regulator of investment advisors.

“I am avoiding the terms ‘self-regulatory organization’ and ‘SRO’ because they are misnomers, implying that the industry regulates itself,” Brown said.

“This is simply not true under FINRA. FINRA’s governing board is comprised of a majority of non-industry public members and their staff are professional, experienced regulators,” Brown said.

He said the legislation would shift the responsibility for investment adviser examinations from the SEC to an independent regulator paid for by the industry, not taxpayers.  “This would free up the SEC to regulate the regulator, as it has done for decades for the brokerage and municipal securities industries, among others,” Brown said.

Besides the FSA, representatives of the the National Association of Insurance and Financial Advisors (NAIFA) and the Securities Industry and Financial Markets Association (SIFMA) voiced support for the new overseer for investment advisors.

Also testifying in favor was Rep. Spencer Bachus, R-Ala., chairman of the panel and sponsor of the legislation.

Rep. Carolyn McCarthy, D-N.Y., is the other co-sponsor.

Testifying in opposition, however, were representatives of the Financial Planning Coalition (FPC), which is comprised of the Certified Financial Planner Board of Standards, Inc., the Financial Planning Association and the National Association of Personal Financial Advisors, as well as John Morgan, Texas securities commissioner, on behalf of the North American Securities Administrators Association, Inc (NASAA).

Thomas D. Currey, NAIFA, immediate past president said, “NAIFA members support smart, balanced regulation – regulation that provides appropriate consumer protections and effective and efficient oversight without creating compliance burdens that would impede the delivery of consumer financial services. H.R. 4624 satisfies those criteria.”

He added that, “NAIFA members who sell securities, by and large, are already subject to FINRA oversight.”

And further added that, “That’s not likely to change, so it just makes sense for our dually registered members to undergo broker-dealer and investment adviser examinations at the same time, by the same regulator.”

“Increasing the rate of SEC examinations would effectively pile another burdensome layer of regulation on many NAIFA members, who are already among the most comprehensively regulated individuals in the financial services industry,” Curry said.

However, the FPC said in a prepared statement of opposition that the proposed legislation “would create a new regulatory structure that would lead to fewer investor choices for financial advice and impose a significant regulatory burden and higher costs on small advisory firms.”

The statement added that, “While the Coalition agrees that more frequent examinations of investment advisers by the SEC are needed,” the proposed legislation “is the wrong solution for this problem,” noting that should it become law the broker-dealer governed FINRA – which has no experience overseeing investment advisers – would most likely become the SRO.”

In his testimony, Morgan, the Texas securities regulator, said NASAA’s position has consistently been that “the regulation of investment advisers should continue to be the responsibility of state and federal governments and that these regulators must be given sufficient resources to carry out this mission.”

“The problems that exist with the SEC’s oversight of federally registered investment advisers have been characterized as a “regulatory gap,” Morgan said.

“NASAA recognizes these problems place investors at risk, and agrees that Congress should act to address them,” Morgan said. He then added, “Crucially, however, no similar gap exists with respect to investment adviser regulation in Texas, nor in the overwhelming majority of states.”

“To the contrary: the Dodd-Frank Act placed great confidence in state investment adviser examination programs by increasing state oversight to those advisers with $100 million in assets under management, up from $25 million,” Morgan said. “This means that a significant number of investment advisers are switching from federal to state regulation.”

This switch, targeted for completion on June 28 of this year, is one of the largest regulatory events involving a coordinated effort by the states and the SEC, Morgan said.

“When the dust settles, approximately 2,500 investment advisers will have transferred their registrations from the SEC to one or more states,” Morgan said. He said that means that the states will be responsible for the oversight of approximately 17,000 investment adviser firms and the SEC will regulate roughly 10,000 investment adviser firms.

“States have been preparing for this switch for two years and look forward to accepting the increased regulatory oversight of mid-sized investment advisers,” Morgan said.

“This is our main focus. NASAA believes that Congress should focus its attention on improving deficiencies in the oversight of federally registered investment advisers, while allowing the states to continue to focus on our distinct responsibility for the oversight of state registered investment advisers,” Morgan said.