Two leaders of the House Financial Services Committee have introduced bipartisan legislation to provide more effective oversight of investment advisers.
Financial Services Committee Chairman Spencer Bachus, R-Ala., and Rep. Carolyn McCarthy, D-N.Y., a member of the committee, introduced the legislation Wednesday in response to a study from the Securities and Exchange Commission that found the agency lacks the necessary resources to adequately examine the nation’s nearly 12,000 registered advisers. As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended a self-regulatory organization as one option for Congress to consider as it looks for ways to help the agency monitor the industry.
The Bachus-McCarthy bill would authorize one or more self-regulatory organizations, or SROs, for investment advisers funded by membership fees. However, the bill quickly provoked opposition from a coalition of financial planning trade associations.
Investment advisers and broker-dealers often provide indistinguishable services to retail customers, yet only 8 percent of investment advisers were examined by the SEC in 2011 compared to 58 percent of broker-dealers.
“The average SEC-registered investment adviser can expect to be examined less than once every 11 years,” Bachus said in a statement. “That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable. Bad actors will naturally flow to the place where they are least likely to be examined. Therefore, it is essential that we augment and supplement the SEC’s oversight to dramatically increase the examination rate for investment advisers with retail customers. Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change.”
The legislation would amend the Investment Advisers Act of 1940 to provide for the creation of National Investment Adviser Associations, registered with and overseen by the SEC. Investment advisers that conduct business with retail customers would have to become members of a registered NIAA. The SEC would have the authority to approve the registration of any NIAA.
The legislation permits the SEC to suspend or revoke an NIAA’s registration, or censure or impose limits on an NIAA’s activities and operations, if the SEC finds that the NIAA has violated the Advisers Act, SEC rules or its own rules. The SEC would also be able to suspend or revoke an NIAA’s registration if the association has failed to enforce compliance with any provision by an NIAA member firm or associated person.
The proposal requires the SEC to determine whether an NIAA has the capacity to carry out the purposes of the Advisers Act and to enforce compliance by its members and their employees with the Advisers Act, the SEC’s rules, and the NIAA’s rules before the association can register as an NIAA.
The proposal also recognizes the authority given to the states over small investment advisers in Title IV of the Dodd-Frank Act by preserving state authority over investment advisers with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.
In addition, the SEC must determine that the NIAA’s rules are designed to prevent fraud and protect investors. The NIAA rules must be consistent with the Advisers Act and fiduciary duties under the Act and state law; and not impose any burden on advisers that is not in the public interest or for investor protection. The bill would also provide for periodic examinations of NIAA members and their related persons, and for coordination of those examinations with the SEC and state securities authorities. It also aims to assure a fair representation of the public interest and the investment adviser industry in the NIAA’s selection of directors and administration of its affairs, and provide that a majority of the organization’s directors do not come from the securities industry.
The bill would also provide for equitable allocation of dues and fees and establish appropriate disciplinary procedures for members and their associated persons that violate the Advisers Act, SEC rules or NIAA rules.
A coalition of financial planning organizations, including the Certified Financial Planner Board of Standards, the Financial Planning Association, and the National Association of Personal Financial Advisors, announced their opposition to the proposed legislation. The Financial Planning Coalition argued that enhancing the existing oversight would be a better, more cost-effective option.
"While we agree with Chairman Bachus that better oversight of investment advisers is needed, we oppose the legislation introduced in the House of Representatives,” they said in a statement. “As a recent Boston Consulting Group study found, outsourcing SEC oversight to a new SRO would be twice as expensive as directing adequate resources to the current SEC oversight program. Building on the SEC's existing infrastructure and experience is a better option than creating an added layer of regulation, and could be accomplished more quickly and effectively, and at far less cost. Creating an SRO for investment advisers would unnecessarily burden small business owners with additional costs.”
They equated the proposed organization to FINRA, the Financial Industry Regulatory Authority, an existing self-regulatory organization for the financial industry.
"Investment advisers are overwhelmingly opposed to a FINRA SRO,” said the coalition. “More than 80 percent of advisers surveyed said they would prefer continued SEC oversight to being regulated by FINRA, an SRO for broker-dealers. We look forward to working with the chairman and others to find an effective way to address the oversight issue without unduly burdening investment advisers. More frequent examinations will help weed out bad actors who would harm investors and undermine the trust that advisers work so hard to earn."
The American Institute of CPAs expressed its opposition to the legislation as well. “The AICPA is the world’s largest association representing the accounting profession," said AICPA president and CEO Barry Melancon in a statement. "Our members provide audit, tax, retirement consulting, plan administration, and financial planning services. Many of our members work for a firm that is registered as, or affiliated with, a registered investment adviser. The bill would transfer oversight of investment advisers from the SEC to a self-regulatory organization (SRO). We oppose this move. We believe that the SEC’s core mission to protect investors requires adequate regulation of the investment advisory profession. The SEC remains the proper regulatory body to protect the public’s best interest. Providing the SEC with resources to properly enforce their rules is the best solution for investors and the public.”
The AICPA cited a study by The Boston Consulting Group in December, which found that funding an enhanced SEC examination program would likely cost half that of creating a SRO for investment advisers. The report also found that funding a SRO would likely cost twice as much for each investment advisory firm as paying user fees to the SEC and that, given the SEC would still have to oversee the SRO, any cost savings to the SEC through creation of a SRO would be minimal.
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