RIA Compliance Blog
Proposed legislation designed to create a self-regulatory organization (SRO) for investment advisers may not be acted on during this Congressional session, according to its sponsor, Rep. Spencer Bachus (D-Ala.). Rep. Bachus, Chairman of the House Financial Services Committee, said earlier this week that no consensus has developed regarding any proposal relating to enhancing investment adviser oversight and that, therefore, no action is imminent.
There has been increasing interest and legislative activity over the past several months relating to investment adviser examinations. While there is almost universal agreement that examination coverage should be increased, there is a sharp division among industry members, regulators and legislators about how to accomplish that goal.
Most observers agree that Rep. Bachus’s bill, if passed, would lead to the Financial Regulatory Authority (FINRA) becoming the SRO for investment advisers. Adviser organizations have split over supporting the bill, with the Financial Services Institute (FSI) as a supporter, and the Investment Adviser Association (IAA) and the American Institute of CPAs strongly opposed. Other investment adviser organizations have also come out in opposition to the Bachus bill, as has the North American Securities Administrators Association (NASAA).
At a hearing held by the Financial Services Committee in June, opponents of Rep. Bachus’s bill predicted that the expansion of the SRO regulatory model to investment advisers would dramatically increase costs borne by investment advisers. Also raised were general objections to the concept of expanding self-regulation, with particular concerns about a lack of transparency and accountability. Proponents of Rep. Bachus bill cited FINRA’s experience in the broker-dealer arena, and its existing examination structure, as reasons to expand SRO oversight to investment advisers.
Also this week, Rep. Maxine Waters (D-Cal.), the ranking Democratic member of the Capital Markets subcommittee of the Financial Services Committee, introduced legislation which would provide additional funding to the SEC so that it could increase oversight of investment advisers directly. Rep. Waters’s bill, entitled the “Investment Adviser Examination Improvement Act of 2012,” would provide for user fees to be charged to investment advisers, which fees would directly fund increased SEC examinations. The bill is designed to be a substitute for SRO proposals such as Rep. Bachus’s bill. Rep. Waters’ approach has gained support over recent weeks, with almost 60% of advisers approving according to one recent survey.
In a statement accompanying the introduction of the bill, Rep. Waters said, “I believe that this approach provides the simplest, most efficient solution to the problem of inadequate adviser oversight. Also, because the user fees contemplated in my legislation would only be used to fund the regulation of investment advisers, and not to subsidize other functions at the SEC, I think that this option would be more cost effective for the industry.”
David Tittsworth, executive Director of the IAA, which supports the Waters legislation, said “investment adviser user fees will be far more effective and efficient in enhancing examinations of advisers than establishing an unnecessary, additional layer of bureaucracy and cost associated with a self-regulatory organization.” Not unexpectedly, FSI issued a statement opposing Rep. Waters’s bill.
While there is disagreement over the substance of the legislative proposals, most observers appear to be in agreement that is it increasingly unlikely the any further action will happen in the area this year. Political realities and policy differences seem to be pushing the investment adviser into 2013, when a new Congress will still have the matter before it.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules.