Advocates and opponents of legislation that would shift oversight of investment advisers from the Securities and Exchange Commission to a separate industry-run regulator are redoubling their lobbying efforts as the bill heads to a potential House committee vote next month.
Although investment advisers are passionate about the issue, it has yet to cross the minds of many lawmakers — a situation that gives both sides an opening to make their cases.
Last week, the Financial Services Institute Inc. sent 25 broker-dealer members from LPL Financial LLC to the Hill to try to generate support for the bill, which it contends will strengthen investor protection by increasing the number of adviser examinations each year.
“It's an issue a lot further in the weeds than most members of Congress have had a chance to focus on,” said Dale Brown, the FSI's chief executive.
“It's mostly an education pro-cess,” he said. “As we're talking to [legislators], we're getting a positive reception.”
The Investment Adviser Association has planned Capitol Hill Day for June 7, when it will send members to congressional offices to try to argue that a self-regulatory organization would add a costly new layer of regulation for advisory firms.
E-MAIL AND LETTERS
In the meantime, IAA members have sent about 100 e-mails and letters to Capitol Hill in the past two weeks, according to David Tittsworth, the IAA's executive director.
Last week at the National Association of Personal Financial Advisors' annual conference in Chicago, Susan John, founder and president of Financial Focus Inc., exhorted attendees to write their representatives about the issue.
The bill in question was introduced last month by House Financial Services Committee Chairman Spencer Bachus, R-Ala., and Rep. Carolyn McCarthy, D-N.Y. It would authorize one or more SROs for investment advisers that would report to the SEC. All advisers with retail clients would have to join one of the SROs and pay membership dues.
The legislation responds to an SEC report in January 2011 that said that the commission lacked the resources to oversee investment advisers.
In introducing his bill, Mr. Bachus noted that the SEC last year examined only about 8% of about 12,000 registered investment advisers, while the Financial Industry Regulatory Authority Inc., which oversees brokers and is making a bid to become the adviser SRO, examined 58% of its members.
As the bill begins its legislative journey, both sides agree that it isn't clear who is paying attention other than Mr. Bachus and Ms. McCarthy.
“I don't think this is an issue that a lot of members of Congress have spent time studying, including people on the Financial Services Committee,” Mr. Tittsworth said.
“It's our responsibility to provide that information,” he said. “We can and should do a better job.”
Finra devotes substantial funding to the lobbying competition. In the first quarter, it spent $270,000, according to the Center for Responsive Politics.
On the other side, the IAA spent $100,000 in 2011, while the Financial Planning Coalition spent $40,000.
FOCUS ON COST
One of the focal points of the SRO battle is how much such an organization would cost. Finra estimates that startup costs would be about $15 million, with annual costs topping out at $155 million.
A Boston Consulting Group study released in December estimated that the setup bill would total $255 million, and the annual cost would be $610 million. The consultant's estimate was commissioned by the Certified Financial Planner Board of Standards Inc., the Financial Planning Association, TD Ameritrade Institutional, IAA and NAPFA.
Last Thursday, The Boston Consulting Group released a review of Finra's estimate, saying that the regulator had underestimated overhead costs and overestimated the productivity of investment adviser examiners. It also said that Finra's estimate omitted the cost of SEC oversight and enforcement. Altogether, these miscalculations would add a total of about $215 million to Finra's startup estimate and $480 million to its estimate of annual costs.
“Until The Boston Consulting Group has at least one conversation with the SEC and Finra about what it takes to run a nationwide examination program, their numbers should be viewed with skepticism and amusement,” Howard Schloss, Finra's executive vice president for corporate communications, wrote in an e-mailed statement. “They are inventing the numbers out of thin air.”
Opponents are telling lawmakers that an SRO would significantly raise costs for small advisory firms.
“There's definitely sensitivity to the possible costs on both sides of the aisle, so a deeper look at the likely financial hit to RIAs is really important,” Dan Barry, chief lobbyist for the Financial Planning Association, wrote in an e-mail. “A lot of members are just getting engaged on the issue now, so I think there is an opportunity to make our case.”
There is no question that compliance expenses will rise for investment advisers because they will be examined more frequently, Mr. Brown said.
“It will cost [advisers] more money,” he said. “It will result in more-effective regulation that in the long run helps their clients and helps them.”
So far, the SRO bill has only three co-sponsors. More likely will be added before a committee vote. Two prominent Democrats have come out against the bill — Rep. Barney Frank, D-Mass, ranking member on the House Financial Services Committee, and Rep. Maxine Waters, D-Calif., the second-highest-ranking Democrat.
The Senate is unlikely to act on the bill, but whatever happens in the House will set a precedent for next year.
[email protected]
