The House proposed draft legislation Thursday that would allow one or more SROs to oversee all investment advisers. The bill was trotted out by House Financial Services Committee Chairman Spencer Bacchus in advance of a Sept. 13 hearing to review provisions of Dodd-Frank that govern the regulation of broker/dealers and investment advisers. These include the SRO matter as well as whether to extend fiduciary duty to brokers and broker/dealers.
Today the SEC oversees and examines all investment advisers but only has sufficient resources to examine them once every nine years. In order for the SEC to transfer its examination power to an SRO, securities laws need to be amended.
Under a Dodd-Frank mandated study released in January, the SEC recommended a number of options for enhancing the examination of investment advisers: The SEC could to continue to do the job, raising additional resources with self-funding; multiple SROs could oversee all investment advisers; or a single SRO could oversee dually registered investment advisers.
In the Sept. 13 hearing, examiners will ask witnesses about all three options, says Duane Thompson, of consulting firm Potomac Strategies and policy analyst for Fi360, a fiduciary training firm. But the Bacchus bill seems to have opted for option number 2, at least for now.
“A question for some of us was whether the bill would be more narrow in its scope, meaning it would only apply to dual registrants,” said Thomspon. “In this case, this is arguably an opening bid. I could see down the road, if this legislation ran into problems, presumably on the Senate, that could be a default—just dual registrants.”
The legislation doesn’t name any particular group as the best option for an SRO, allowing for any applicants to come forward. But it does say that the applicant would need to have the “capacity” to oversee investment advisers: meaning sufficient resources to do the job.
“I don’t think they would put FINRA in the bill, because FINRA changed its name just a few years ago,” says Thompson. “But there is a general recognition whether you’re a member of Congress or an interested observer that FINRA is the heavy weight and the odds-on favorite. So I think there’s an assumption that if a bill is introduced FINRA would be the obvious candidate.”
Indeed, FINRA, which examines its broker/dearler constituents every four years, has been vocal about wanting to assume the role of SRO for investment advisers. The investment adviser industry, however, worries FINRA has a broker/dealer bias and has called for the SEC to continue to do the job.
In the meantime, a separate SRO, called SROIIA, set up shop in March so that it could act as an SRO for investment advisers if given the option. SROIIA has recently teamed up with Fi360 to create a fiduciary examination for registrants.
B/ds In Favor, Investment Advisers Opposed
The Investment Adviser Association on Thursday issued a response to the House SRO legislation, saying the group plans to oppose it at the Sept. 13 hearing.
“IAA Executive Director David G. Tittsworth will testify in opposition to draft legislation that would require advisers to be members of a self-regulatory organization (SRO) at a hearing before the House Financial Services Capital Markets Subcommittee at 10:00 a.m. on Tuesday, September 13,” the IAA letter said.
But the Financial Services Institute, which represents independent broker/dealers and independent advisors, was pleased with the draft of the bill, and will continue to lobby in support of a single SRO. David Bellaire, general counsel and director of government affairs at FSI, said the legislation would enhance investor protection and level the playing field between b/d advisors and investment advisers.
“Since the start of the legislative process that resulted in Dodd-Frank, FSI has urged Congress to adopt legislation that would allow the SEC to close the regulatory gap, by approving an SRO for retail investment advisers,” said FSI President and CEO Dale Brown, in a statement. “If adopted this legislation would accomplish that goal and bring about significant improvements in investor protection and a balanced playing field for all financial advisors.”
FSI has supported FINRA to be the SRO, because the group believes it has the research, experience and funding mechanism to pull it off, Bellaire said. FINRA can also fill the knowledge and experience gap by hiring additional staff, he added. FSI is also advocating for a single SRO, rather than multiple SROs, because multiple regulators can create gaps.
In the long term, FSI has high hopes that the bill will pass, Bellaire said.
Fi360, meanwhile, said it still prefers the SEC do the job. "Having carefully reviewed the initial discussion draft of an SRO bill for investment advisers, fi360 continues to believe that the most cost-effective solution for investor protection is a self-funded SEC and continued, direct oversight of advisers," the group said in a statement.
"Ironically, at a time when critics of a fiduciary standard are calling for a cost-benefits analysis, Congress has bypassed a critical step by proposing SRO legislation without having the Government Accountability Office compare the difference in costs and benefits between an SRO and a fully funded SEC," Fi360 continued. "A new bureaucracy will increase costs for the vast majority of investment advisers, forcing them to pass on higher costs to consumers and leaving investors with potentially fewer choices in advisory services."
