Finra oversight of advisers gaining ‘mo

The sponsor of legislation that would create a self-regulatory organization for investment advisers today suggested that he would consider limited changes to the proposal.
House Financial Services Committee Chairman Spencer Bachus, R-Ala, said his bill — which would establish one or more SROs for investment advisers — wasn’t meant to take away the role state regulators have in overseeing smaller advisory firms.
“We do not want to ignore the state’s role; it’s very important,” Mr. Bachus said. Additionally, if the Financial Regulatory Authority Inc. became an SRO for investment advisers, there may need to be “enhanced oversight and transparency,” he said during the hearing.
Mr. Bachus’ Investment Adviser Oversight Act of 2011 is meant to boost regulation of advisers after a Securities and Exchange Commission report found that only 9% of registered advisers are examined each year, as it lacks the resources to do more. Many members of the House Financial Services Capital Markets Subcommittee, which held the hearing, also pointed to the SEC’s failure to uncover Bernard Madoff’s ponzi scheme as proof that more oversight is needed.
Republicans at the hearing did not signal any willingness to give the SEC more resources to boost their inspection program or allow them to charge firms user fees to pay for examinations — two other solutions the commission had proposed in a report to Congress.
Registered investment advisers and state securities regulators, many of whom have balked at Mr. Bachus’ proposal, favor user fees for examinations rather than a self-regulatory organization.
Some state regulators, as well as the Financial Planning Coalition, said Mr. Bachus’ legislation gives jurisdiction of state-registered investment advisers to an SRO, which would then be overseen by federal securities regulators.
“This would impose an additional layer of regulation on state-registered advisers, with potentially conflicting rules and enforcement mechanisms between federal and state regulators,” the coalition said in a statement. The FPC, made up of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors, was not asked to speak at the hearing.
One state regulator also expressed concern that Finra lacks the accountability and transparency necessary to oversee the investment advice business adequately.
“SROs remain organizations built on the premise of self-rule and are, as a matter of first principle, accountable to their members, not the investing public,” said Steven Irwin, Pennsylvania’s securities commissioner and the North American Securities Administrators Association’s legislative-affairs chairman. “No matter how many safeguards are instituted, an SRO has substantial and inherent conflicts of interest that governmental regulators do not.”
But in a speech in Wichita, Kan., today, new NASAA President Jack Herstein said that even while NASAA fights Mr. Bachus’ SRO proposal, the group still has to build ties with Finra.
“As states, we need to acknowledge that self-regulation is not going away and we need to enhance our relationship with Finra,” said Mr. Herstein, assistant director of the Department of Banking and Finance in Nebraska. “As is frequently the case, that which unites us is greater than that which divides us.”
And Richard Ketchum, Finra’s chief executive, testified that if the agency were to become an SRO for investment advisers, it would “implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business.” He also said the group would be willing to have enhanced oversight from the SEC if it were tapped to regulate investment advisers. Finra currently oversees broker-dealers.
Because the SRO would have limited rule-making authority under Mr. Bachus’ proposal, Mr. Ketchum assured lawmakers that it considers the economic costs and benefits to any rules it considers — a complaint many Republican congress members have leveled against the SEC and its recent proposals.
David Tittsworth, the Investment Adviser Association’s executive director, pointed out that there are no laws that would require such a cost-benefit analysis of Finra, while the SEC operates under strict rules that require it to consider the cost of its regulations.
The Financial Services Institute Inc., Securities Industry and Financial Markets Association, the National Association of Insurance and Financial Advisors and the Association for Advanced Life Underwriting all testified that they support Finra as an SRO for advisers.
One group that recently changed its position to support Finra as an adviser SRO is the Consumer Federation of America. Its investor protection director, Barbara Roper, told the panel that the group was “forced to reassess” its opposition to the SRO path.
“You can’t continue to say no if that’s the only proposal they’re willing to entertain,” Ms. Roper said in an interview after the hearing.
Some groups that weren’t invited to speak at the hearing said they felt it was unfair to have so many pro-SRO groups provide testimony.
“The panel was stacked with those who are pro-SRO,” said Marilyn Mohrman-Gillis, managing director of public policy and communications with the Certified Financial Planner Board of Standards Inc. “If we go to an SRO model, it must be structured in a way that’s truly independent, not under an organization that at its core is a broker-dealer membership organization.”

Related Topics: Financial Industry Regulatory Authority