WASHINGTON -- House Democrats on Wednesday took aim at a controversial bill that would establish a self-regulatory organization to oversee retail investment advisers, raising a litany of concerns about the impact on small investment practices and diminishing the roles of existing federal and state authorities.

CHECK OUT WHAT LEADING EXPERTS ARE SAYING ABOUT THE SRO DEBATE

The Investment Advisers Oversight Act, sponsored by Financial Services Committee Chairman Spencer Bachus (R-Ala.) and New York Democrat Carolyn McCarthy, would direct the Securities and Exchange Commission to recognize one or more SROs to police the sector.

The push for the bill comes out of the consensus recognition that the SEC, at its current level of funding, cannot shoulder the burden of effectively regulating investment advisers. By the agency's own count, its examiners only evaluated 8 percent of advisers in 2011, while 40 percent of firms in the fast-growing sector have never been evaluated at all.

But if the problem is widely understood, the solution is anything but noncontroversial.

"I would first like to fully fund the SEC," Barney Frank (D-Mass.), the ranking member of the Financial Services Committee, said at a hearing this morning considering the Bachus bill. "The very fact that we're considering an SRO argues strongly against the inadequate funding this Congress has given the SEC."

CHECK OUT COMPLETE COVERAGE OF THE SRO DEBATE

Frank cited the recent hit that financial giant JP Morgan took from risky trades that had gone sour. The $2 billion-plus loss that the firm reported would more than cover the budgets of the SEC and the Commodities Futures Trading Commission, Frank said, arguing that the Bachus bill would strip the federal regulators of their proper oversight authority at a time when their role needs to be expanded. Bachus later pointed out the SEC's own failure to take action against Bernard Madoff's investment firm, whose eventual collapse dwarfed the JP Morgan losses.

It was the 2010 Dodd-Frank Wall Street reform bill that Frank, then the chairman of the Financial Services Committee, helped push through the House that directed the SEC to conduct a study evaluating the regulatory landscape of the adviser industry. The agency included in its recommendations congressional action to deliver additional resources for it to increase its own investigations or, alternatively, to cede oversight to a self-regulatory organization as the Bachus bill would direct.

Echoing Frank's concerns about the SRO approach, Maxine Waters (D-Calif.) announced this morning that she is in the process of drafting legislation that would empower the SEC to collect user fees from advisers that would in turn be used to fund additional examinations.

That approach is supported by certain industry groups, including the Investment Adviser Association and the Certified Financial Planner Board of Standards.

But some supporters of the Bachus bill argue that strengthening the role of the SEC, a politically charged agency that is still tarnished for failing to curb the many excesses that led to the financial crisis, is a political dead end. Count among those original co-sponsor McCarthy, a Democrat, who said of additional SEC funding, "I would love to, but it's just not going to happen."

The Financial Services Institute has taken that position, tepidly endorsing FINRA, the SRO that oversees broker-dealers, to expand its role cover investment advisers.

"We have no illusions that FINRA is a perfect regulator. Some of the criticism it is receiving is valid," FSI President and CEO Dale Brown told the committee. "Many credible observers, such as the [Government Accountability Office], have documented areas in which FINRA can improve its transparency and accountability. FINRA should embrace these reforms as it continues to improve as the broker-dealer regulator and become the investment adviser regulator."

With dual-registrations on the rise and the lines blurring between the broker-dealer and adviser professions, Brown noted that FINRA, for all its shortcomings, is the most appropriate organization to take on the role of overseeing RIAs.

"It would create a lot more consistency having one regulator looking at both sides of the business," Brown said, making a point to characterize FINRA as an "independent industry regulator" rather than an SRO, noting that the majority of the organization's board is comprised of non-industry members.

But the Bachus proposal has also drawn sharp opposition from state regulators, who see in FINRA an additional layer of regulation that would adversely affect smaller investment firms currently regulated by the states, many of whom might close up shop if they were forced to pay membership fees to FINRA or another SRO, according to Texas Securities Commissioner John Morgan, who testified on behalf of the North American Securities Administrators Association.

The bill "would require firms already well regulated by the states to become members of a self-regulatory organization," said Morgan, who cited a high rate of adviser examinations reported by state authorities. "That is not necessary. There is no regulatory gap there."

Morgan indicated that his group would not oppose the bill if language concerning state-regulated advisers were dropped.

"State regulators have done an exceptional job," Bachus said, noting that his bill is actually projected to expand the oversight role of the states, bringing an estimated 7,000 more advisers under the purview of authorities at that level, though they would still be required to register with the SRO. "We want to be very sensitive to the state regulators," Bachus said, adding that he expects his committee to consider an array of amendments when the bill comes up for a markup.

But for David Tittsworth, executive director and executive vice president of the Investment Adviser Association, inserting an SRO such as FINRA into the regulatory mix is unpalatable regardless of what limiting conditions are imposed.

While his group is advocating for user fees assessed to advisers to fund SEC reviews, the IIA fears that the charges a group like FINRA would collect would be more burdensome to its members, particularly with some of the largest firms likely exempted from SRO oversight as the Bachus bill is currently written. Tittsworth also warned that an SRO, existing outside of the normal procedures for federal regulatory agencies, would not be held to the same standards of accountability and transparency as the SEC.

"Outsourcing the SEC's responsibilities to an SRO is not the most efficient or effective way to enhance adviser oversight," he told the committee.