House subcommittee chairman sees merits of SROs, fiduciary standard

The new chairman of a House subcommittee with jurisdiction over investment adviser issues is holding his fire on two crucial questions effecting the industry — until he reads upcoming reports addressing the topics.

The new chairman of a House subcommittee with jurisdiction over investment adviser issues is holding his fire on two crucial questions effecting the industry — until he reads upcoming reports addressing the topics.

Rep. Scott Garrett, R-N.J., said he’s waiting to see the Securities and Exchange Commission’s study on the need for a self-regulatory organization for advisers — as well as the commission’s report on the efficacy of a universal fiduciary duty for retail investment advice — before taking a firm position on either.

Despite holding off until getting the reports, which are both due this month, Mr. Garrett indicated that SROs have a track record of success.

“I do see them as positive forces … having worked effectively in other areas,” Mr. Garrett, chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, said in an interview with InvestmentNews on Jan. 6. “They hold merit.”

If the SEC recommends an adviser SRO, it will have to be authorized by Congress. The SRO report must be delivered to the appropriate House and Senate committees by Jan. 17.

The fiduciary-duty study, which will assess the differences in oversight of investment advisers and broker-dealers, and any gaps in regulation, is due Jan. 21. The SEC can then write a rule establishing a universal standard of care for retail investment advice.

Mr. Garrett was circumspect about whether fiduciary duty should be standard.

“This is not a quick-solution area,” Mr. Garrett said. “There are legitimate arguments being made on both sides of the issue. I’d like to see what the study has to say as far as what the impact is of a single standard.”

The priority for Mr. Garrett is looking out for middle-income investors.

“On one side, you have uniformity of regulation so that they know they’re adequately protected,” said Mr. Garrett, who was first elected to Congress in 2002 after having served for 12 years in the New Jersey Assembly. “On the other side of the equation, using the little investor again as the example, is making sure they’re not squeezed out of the market.”

As the SEC proceeds with its two studies on investment advice, it doesn’t look as if most Republicans want to stop the Dodd-Frank law in its tracks as they do with health care reform. A House vote to repeal the health care law that was scheduled for this week has been postponed following the shooting of Rep. Gabrielle Giffords, D-Ariz., at a constituent meeting in her district Saturday.

The Republican majority will seek to influence and shape Dodd-Frank implementation.

“I’m not about to say, as I would with health care reform, let’s just throw the whole thing out,” Mr. Garrett said. “There were some elements that need to be looked at. But certainly, over the last months, we have already seen the negative impact of it on a number of different areas. Whether you’re talking about the securitization aspect, whether you’re talking about the derivative end-user aspect, the studies that are being done with regard to financial advice, these areas have to be given a lot more thoughtfulness.”

Mr. Garrett cautioned regulators not to rush out rules simply to satisfy Dodd-Frank requirements.

“You don’t want to meet the deadline for the deadline’s sake just because it’s in the statute,” Mr. Garrett said. “You want to make sure that the regulations actually improve the capital markets — that you don’t have to go back and reform again.”