Bill would escalate adviser oversight

As the House Financial Services Committee this week begins to hash out plans to make President Obama’s proposed consumer financial protection agency a reality, state-regulated investment advisers could find themselves under federal jurisdiction.

Under the terms of sweeping consumer protection legislation introduced last Wednesday by the committee’s chairman, Rep. Barney Frank, D-Mass., at the behest of the White House, the nation’s approximately 14,000 investment advisory firms overseen by state securities regulators would also be regulated by the agency, while the 11,000 advisory firms regulated by the Securities and Exchange Commission wouldn’t.

Congress this week will begin holding hearings and working in earnest to approve the Consumer Financial Protection Agency Act of 2009 by the end of the month.

The possibility of increased federal oversight is raising concerns in the advisory community.

“That provision would pose a significant problem for investment advisers, who may be subject to different standards on the state level from the federal level,” said Duane Thompson, managing director of the Washington office of the Denver-based Financial Planning Association.

“We want to see financial planners subject to uniform regulation as much as possible,” he said. “If legislation is proposed that creates obstacles to uniform regulation, we would be very concerned about it.”

The proposed agency’s broad powers would allow it to write new rules for entities it supervises, though it isn’t clear how it would regulate state-registered advisers, Mr. Thompson said.

“They could adopt the ADV as the disclosure document or they could look at something else,” he said, referring to the disclosure document that investment advisers are required to file with regulators.

The FPA hasn’t yet taken a position on the bill, but will “carefully analyze it,” Mr. Thompson said.

Under the terms of the legislation, the consumer protection agency would oversee any person who sold or recommended such consumer-oriented financial products as mortgages, credit cards and tax refund loans.

However, the bill excludes from the proposed agency’s jurisdiction firms that are regulated by the SEC. Investment advisory firms that manage $25 million or more are regulated by the SEC, while advisory firms that manage less than that are regulated by the states.

Some industry watchers wonder if putting state-registered advisers under the authority of the agency, as proposed, would be a mistake.

“My guess is that it’s a drafting oversight,” said Barbara Roper, director of consumer affairs for the Consumer Federation of America in Washington, who thinks that that provision will be removed by legislators.

But Eric Stein, deputy assistant Treasury secretary for consumer protection, confirmed in an e-mail that investment advisers registered with states would be monitored by the proposed agency “to the extent that the person provides investment [advice] to consumers or engages in other financial activities in connection with providing other consumer financial products or services.”

That said, “the proposed act contemplates that a state-registered investment adviser would remain primarily regulated by the state securities regulator with respect to those activities,” he said.

Putting state-regulated advisers under the scrutiny of a federal agency likely would lead to conflicts with state officials.

“We’re concerned about the text of it,” William F. Galvin, secretary of the Commonwealth of Massachusetts, said of the legislation. “We do not want to see any pre-emption of state authority to register, enforce or regulate any investment advisers that are currently under our jurisdiction.”

As proposed, the consumer financial protection agency could even find itself in a turf war with the SEC, said Floyd Stoner, executive vice president for congressional relations and public policy at the American Bankers Association in Washington.

“Products in the investment sphere compete directly with products that come under the jurisdiction of the [consumer financial protection agency],” he said.

The North American Securities Administrators Association Inc. of Washington plans to take up the issue with the Obama administration, general counsel Rex Staples said.

“If they left it like that, that would not be good,” he said. “The substantive reforms that need to take place in the securities arena are not going to come out of this.”

For their part, advisers question how the plan would work.

“We support protecting consumers, but we’re just not sure exactly how this would roll out,” said Diahann Lassus, chairman of the National Association of Personal Financial Advisors of Arlington Heights, Ill. She is president of Lassus Wherley & Associates PC of New Providence, N.J., which manages $250 million.

NAPFA’s industry issues committee is expected to review the matter, Ms. Lassus said. So will the Financial Planning Coalition, a lobbying group formed by the Certified Financial Planner Board of Standards Inc. of Washington, the FPA and NAPFA.

It isn’t clear how bringing state-regulated advisers under the proposed agency would affect financial planners, said Ron Rhoades, chief compliance officer and director of research at Joseph Capital Management LLC in Hernando, Fla., which manages about $80 million.

He is a member of NAPFA’s Industry Issues Committee, which handles government policy issues.

The SEC has long been “challenged” in trying to determine how financial planning services should be regulated, Mr. Rhoades said. “They can regulate investment advisers, but not financial planning.”

E-mail Sara Hansard at [email protected].