Less than two weeks after tabling the legislation he designed to shift regulation of investment advisers, House Financial Services Committee Chairman Spencer Bachus, R-Ala., reopened the debate by taking a shot at advisers.
In an opinion article in last Monday's Wall Street Journal, he asserted that the best way to prevent another investor rip-off such as the $65 billion Ponzi scheme perpetrated by Bernard Madoff is to establish a self-regulatory organization to oversee advisers.
Most investment advisers strongly oppose the notion of an SRO, especially if it ends up being the Financial Industry Regulatory Authority Inc., the self- regulator for brokers. Advisers maintain that an SRO represents a costly new layer of bureaucracy that threatens the viability of small advisory firms.
Mr. Bachus' bill is misguided, according to advisers, because the way to prevent the next Madoff is to zero in on the few advisers who have direct access to investor assets.
“They sweep everybody into the same category,” Armand D'Alo, owner of Oak Tree Advisory Services Inc., said of Mr. Bachus' approach. “It overregulates people who don't have custody of client assets and aren't in the position to touch client money.”
Many complained that lawmakers aren't familiar with the investment advisory business.
“I don't think they really understand what we do,” said Thomas Wolf, chief compliance officer at The Planners Network Inc.
“There's just an unrealistic as- sessment of the various levels of ad- viser activity on behalf of the client,” he said. “But the regulations come out, and they apply to everybody.”
FIDUCIARY DUTY
The multiple, lengthy disclosures in a brokerage contract are incorrectly equated with more protection, according to Kirk Michie, a partner at Triton Pacific Capital Partners LLC.
Instead, it is the investment advisers' fiduciary duty, which requires them to act in the best interests of clients, that sets them apart from brokers, who are required to meet a less stringent suitability requirement, he said.
“A lot of what I hear from Congress and regulators is ill-informed,” Mr. Michie said. “The regulators assume that the [relationship model] that asks the client to affirm more often is safer.”
A spokesman for Mr. Bachus said that the lawmaker is trying to address the Securities and Exchange Commission's lack of resources to conduct examinations, which has been blamed for allowing unscrupulous advisers to prey on investors.
“By increasing examinations of investment advisers, a policy that the investment adviser industry realizes is necessary, the bill not only protects investors but also helps protect the integrity of the investment adviser industry,” the spokesman, Jeff Emerson, wrote in an e-mail.
Mr. Bachus' bill, which he introduced with Rep. Carolyn McCarthy, D-N.Y., would authorize one or more SROs to take over adviser regulation from the Securities and Exchange Commission.
On July 25, however, he indicated that the measure wasn't moving. He suspended it following the introduction of a bill by a committee Democrat, Rep. Maxine Waters of California, that would allow the SEC to charge advisers user fees to fund examinations.
Both bills respond to a January 2011 SEC report, mandated by the Dodd-Frank financial reform law, in which the commission indicated that it can examine annually only about 8% of the 10,000 registered advisers.
The SEC offered three ways to strengthen adviser oversight: establish an SRO, allow the SEC to charge user fees or extend Finra's reach to include advisers dually registered as brokers. Each option would require congressional approval.
Advisers breathed a sigh of relief when Mr. Bachus said that no legislation will move forward until a consensus is reached.
Rather than remaining dormant, however, the SRO fire was reignited following the publication of his article. Mr. Bachus stoked the embers by suggesting that advisers are trying to avoid further regulation.
“Understandably, many investment advisers are not excited about increased oversight, so their lobbying organizations have come out against our bipartisan bill,” he wrote.
Advisers counter that they aren't trying to sidestep the government.
“I don't know of any adviser who's looking to avoid oversight,” Mr. Michie said. “They do want to avoid onerous paperwork and other steps that don't improve the client experience and client returns.”
Mr. Wolf said: “I'm trying to avoid the wrong kind of regulation.”
MADOFF BLAME
Another volatile point in the SRO debate that was raised again in Mr. Bachus' Op-Ed is the parsing of blame for not stopping Mr. Madoff.
“The SEC failed to protect investors and detect fraud, even though evidence about the Madoff and [R. Allen] Stanford Ponzi schemes was handed to them by insider informants on a silver platter,” Mr. Bachus wrote.
Finra maintains — and reviews by its board and the SEC inspector general's office have concluded — that Mr. Madoff's fraud occurred on the investment advisory side of the operation, to which the SRO argues that it had no access. He registered as an investment adviser in 2006 and admitted to his fraud in 2008.
Finra should have reviewed internal controls at Mr. Madoff's firm, which shouldn't have been able to stiff-arm the SRO's inspection or information requests, John Coffee, a Columbia University law professor, said during congressional testimony in 2009.
“Using Madoff as the poster child is absolutely misleading,” said David Tittsworth, executive director of the Investment Adviser Association. “The SEC doesn't deserve to be exonerated, but the NASD/Finra clearly had jurisdiction over the Madoff firm at all times.”
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