Due Diligence

SRO for Investment Advisers Faces Headwinds: Frank Says No, Bacchus Delays Action

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self-regulation

A few days after House Financial Services Committee ranking member Barney Frank (D.-Mass.) said he thinks giving an SRO (self-regulatory organization) authority to oversee investment advisers would be a very bad idea, the committee's chairman Spencer Bacchus (R.-Ala.) announced that he would delay introducing a bill that proposes just that until the Spring. Perhaps he feels that Frank's opposition would make now a difficult moment to get support for such legislation.

In a Dodd-Frank-mandated report released early this year, the Securities and Exchange Commission recommended three ways to increase investment-adviser examinations: allow the SEC to charge user fees for exams, establish a number of SROs to regulate advisers, or give a single SRO authority over dually registered investment advisers. Each alternative would require congressional authorization.

Republicans support offering oversight authority to FINRA, now the SRO for broker/dealers. They have not been supportive of giving more funding to the SEC. While the SEC gets all of its funding from user fees today, Congress must approve how much of those fees it can actually allocate to its budget.

During a press conference in Washington D.C. on Nov. 29, Frank, who is one of the architects of financial services regulatory reform package Dodd-Frank and who will retire after this term, said he is "skeptical" of SROs. Republicans have been engaging in a "self-fulfilling" argument, he added, according to reports. They refuse to give adequate funding to the SEC, and then say the only way to police advisers is to use an SRO because the SEC doesn't have adequate resources. Frank says giving government agencies the money they need is the easy answer.

It has already been two years since Dodd-Frank was approved in Congress and still little headway has been made on the provisions that would have the greatest impact on the wealth management industry: extension of the fiduciary standard to brokers when they provide investment advice, and enhanced oversight of investment advisers. That's because Congress left most of the implementation of reform up to regulators, i.e. the SEC. But without the resources to do its job, the SEC has been stalled.

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