Outlook dim for adviser SRO in financial-reform proposal

The Obama administration’s sweeping proposal to tighten financial regulation is unlikely to press for the formation of a self-regulatory organization to oversee investment advisers.

The plan, to be unveiled Wednesday, will serve as a road map for legislators and regulators as they consider how banks, insurance companies, broker-dealers and other financial services firms will be regulated.

Treasury Secretary Timothy Geithner will testify regarding the proposal Thursday before the House Financial Services Committee.

Facing intense opposition from the financial services industry and regulatory agencies, the administration has reconsidered its plans to push for consolidating agencies or adding a lot of new ones, people familiar with the matter said.

“I’m doubtful that the administration’s plan will include a proposal to establish an SRO for advisers,” said David Tittsworth, executive director of the Investment Adviser Association in Washington. “The administration will focus on core issues related to the economic crisis, and the SRO issue is not such a core issue.”

STATUS QUO

Indeed, the administration is “being pushed away from any significant regulatory change by the forces that have opposed reform,” said Hal Scott, a law professor at Harvard Law School in Cambridge, Mass., who is director of the Committee on Capital Markets Regulation. “Those forces are the industry, Congress and the existing regulators,” who all want to maintain the status quo, he said.

Instead, the administration’s proposal likely will focus on providing more-stringent regulation of mutual funds, annuities, mortgages and other financial vehicles commonly used by consumers. That in turn will profoundly affect the regulatory landscape for financial advisers, observers said.

“The whole point would be to take a more aggressive consumerist approach,” said James Delaplane, a partner in the Washington law firm Davis & Harman LLP. “The more they create some structure that’s got a consumerist perspective or agenda, the more likely there will be significant changes for advisers.”

The Investment Company Institute of Washington has pushed to keep investment products such as mutual funds out of the mix of products that would fall under consumer protection plans. The ICI has argued that new regulations on consumer products should be focused on products such as checking ac-counts and mortgages.

“Investor protection has been the primary goal of the Securities and Exchange Commission in its regulation of mutual funds for almost 70 years,” said Rachel McTague, an ICI spokeswoman. “The result is an effective system of regulation that has served mutual fund investors well.”

REGULATORY OVERLAP?

Organizations that represent advisers are wary that the administration will in-clude a proposal to establish a Financial Product Safety Commission to focus on consumer issues. That could lead to overlapping regulations when it comes to financial products, they argue.

To do so would result in “adding more layers, which has the potential to create more regulatory gaps,” said Dale Brown, chief executive of the Financial Services Institute Inc. of Atlanta. The FSI represents dually registered broker-dealers and in-vestment advisory firms.

“If you’re interested in consumer protection, you get a more immediate and a bigger bang by relying upon the current structure than creating a new one,” said Wayne Abernathy, executive vice president for financial-institutions policy and regulatory affairs at the American Bankers Association in Washington.

Last week, Senate Banking Committee Chairman Christopher Dodd, D-Conn., called for creating an in-dependent consumer protection agency that would regulate credit and bank products, and protect consumers from “predatory” financial practices of payday lenders, mortgage brokers, banks and other financial institutions.

Rather than being relegated to obscurity — as some had predicted a few months ago — the SEC likely will gain power and authority as a result of the regulatory reform. Last week, Mr. Geithner called for legislation that would give the SEC authority to issue regulations giving shareholders more say over executive compensation at public companies.

SEC Chairman Mary Schapiro announced at his press conference her intention to have the SEC consider a package of new proxy disclosure rules concerning compensation disclosure.

The administration appears likely to propose setting up a council, possibly headed by the Federal Reserve Board, that would collect data and oversee financial institutions that could have an impact on the entire financial system if they failed, industry officials said.

E-mail Sara Hansard at [email protected].