Due Diligence

Opposition to SRO for Investment Advisers Grows

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The chorus of “boos” against Congressman Spencer Bachus’ SRO bill is growing ahead of the hearing scheduled for Wednesday of this week: Today, Barbara Roper, of the Consumer Federation of America, sent a letter to the House Financial Services Committee expressing that organization’s opposition to the Investment Adviser Oversight Act of 2012, HR 4624. Last year, Roper had expressed support for the idea of one or more SROs replacing the SEC as the examiner for investment advisers, saying that absent greater will to increase funding for the SEC, having an SRO is better than the status quo.

Until recently, consensus from most corners of the wealth management industry had been that FINRA was a shoe-in to take on increased oversight of investment advisers recommended under Dodd-Frank reform legislation signed into law in 2010. While the Bachus legislation does not name FINRA specifically, it is the only well-established SRO with the resources and political muscle to do so.

Roper joins a number of other dissenters, including an independent non-partisan government reform group the Project on Government Oversight, which sent a scathing letter to members of the House Financial Services Committee opposing the bill. “Finra’s inherent conflict of mission, its lack of transparency and accountability, and its excessive expenditures on executive compensation and lobbying illustrate why creating an SRO for investment advisers will not serve the interests of investors, shareholders, consumers or other stakeholders,” stated the letter from POGO. “In addition, creating a private self-regulatory group for investment advisers would create significant costs and oversight challenges for the SEC.”

The Massachusetts Securities Division released the results of a poll last week that indicated that if an SRO takes up investment adviser oversight and examination, it could result in the shuttering of 41 percent of investment advisory firms in the state. The association of state securities regulators, NASAA, opposes the bill in part because it usurps their authority over investment advisers with fewer than $100 million in assets.

Rep. Maxine Waters, D-Calif., the second-highest ranking Democrat on the House Financial Services Committee, has publicly voiced her opposition to the bill as has Rep. Barney Frank, D-Mass., ranking member on the House Financial Services Committee. Schwab Adviser Services will also oppose the bill in testimony this week. In addition, the AICPA has told Congress it thinks the SEC should continue to oversee investment advisers, rather than an SRO.

The Financial Services Institute, which represents broker/dealer firms, has long supported making FINRA the SRO for investment advisers. FINRA also supports it, as does NAIFA, the national association of insurance and financial advisors.

There is much disagreement over how much it would cost to get an SRO for investment advisers up and running. The Boston Consulting Group released estimates of the cost in December, while FINRA issued its own assessment in late April, with vastly lower numbers. BCG then defended its own cost calculations, and FINRA came back with a defense of its numbers.

 

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