An Industry Divided: House Panel Set to Weigh Bill on SRO for Advisors

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As lawmakers take up legislation that would reshape the regulatory landscape for retail investment advisers, industry groups are poised to present sharply contrasting visions for where expanded oversight authority should be housed.

On Wednesday, the House Committee on Financial Services plans to hold a hearing to consider the Investment Adviser Oversight Act, a bipartisan bill that would empower a self-regulatory organization (SRO) to police the industry.


As a starting point, and in the aftermath of the Dodd-Frank Wall Street reform bill, the notion of expanded oversight authority of investment advisors is not particularly controversial. The Securities and Exchange Commission, which currently oversees the sector, has acknowledged that it lacks the resources to effectively evaluate consumer-facing adviser firms. In April, SEC Chairman Mary Schapiro told a financial services subcommittee that the agency had examined only 8% of registered investment advisers in fiscal 2011, and that roughly 40% had never been reviewed. 

The Dodd-Frank bill, signed into law in 2010, recognized that regulatory gap, and directed the SEC to conduct a study that produced a menu of options for strengthening oversight of the RIA sector. The agency included in its proposals additional funding to beef up RIA examinations or, alternatively, authorizing an SRO to handle the regulatory reviews.

The bill that the House committee will consider this week, sponsored by Chairman Spencer Bachus (R-Ala.) and Carolyn McCarthy (D-N.Y.), would codify the latter option, directing the SEC to recognize one or more self-regulatory outfits to conduct examinations of investment advisers.

Though it is not specified in the bill, the most likely candidate to assume the responsibility for overseeing RIAs appears to be the Financial Industry Regulatory Authority, or FINRA, the group that currently regulates broker-dealers. And while there is near consensus that the current regulatory regime is inadequate, the prospect of an SRO has left industry groups, regulators and consumer advocates sharply divided.

"We are squarely in the camp of advocating for more frequent examination of investment advisers," said Marilyn Mohrman-Gillis, managing director for public policy and communications at the Certified Financial Planner Board of Standards, or CFP Board. "We think it's obviously good for consumers and good for the industry as well. The only question is, what's the right way to do it."

The CFP Board and other groups organized under the Financial Planning Coalition plan to submit testimony to the Financial Services Committee opposing the Bachus bill's SRO proposal, instead calling for additional funding for the SEC to expand its examinations of RIAs.

That group and other critics of the SRO approach are arguing that empowering FINRA would add a costly layer of bureaucracy for RIAs to navigate, while exemptions in the Bachus bill would preserve the status quo of SEC oversight for the largest adviser firms, meaning that the regulatory and financial burden would fall disproportionately to smaller shops.

But backers of the bill, including the Financial Services Institute, have argued that empowering an SRO is the only viable option for enhancing regulatory oversight of RIAs in the current political climate. Last week, FSI Chairman Joseph Russo posted a blog offering a tepid endorsement of the Bachus bill, writing that "this is a classic 'the devil you know versus the devil you don't' situation."

The FSI and others are arguing that any proposal to expand the SEC's resources for RIA oversight, whether that would come from a budgetary appropriation or, as the CFP Board advocates, user fees assessed to advisers, is a political non-starter. By that reckoning, the SRO is the only practical mechanism for strengthening RIA regulation, and FINRA, though hardly perfect, is the organization best suited to take on that role.

"It's one of those grit your teeth and bear it situations," said Chris Paulitz, a spokesman for the FSI. "If we're going to close the gap, if we're going to move forward, if we're not going to let perfect be the enemy of the good, this is the only viable option, and the only political reality."

FSI President and CEO Dale Brown plans to amplify that message as one of the witnesses at Wednesday's hearing, where he will appear alongside Richard Ketchum, the chairman and CEO of FINRA, which has been advocating for expanding its regulatory authority to cover RIAs.

Witnesses representing the North American Securities Administrators Association and the Investment Adviser Association will counter with the argument that state and federal oversight, funded by user fees, are the most appropriate mechanism to achieve sufficient industry oversight, rather than adding a new regulatory and compliance framework.

The FSI and CFP Board have offered sharply contrasting survey data purporting to represent industry opinion on the SRO question. In a poll of its adviser members, the FSI reported that 75% said they support the group's position of establishing FINRA as the regulatory authority. Meantime, in a survey commissioned by the CFP Board and others, the Boston Consulting Group found an 81% approval rate for bolstering the SEC's oversight through user fees.

Asked about the disparity in those figures, Mohrman-Gillis of the CFP Board questioned the FSI's methodology, challenging the notion that the group's survey reflected the genuine interests of the RIA community writ large.

"FSI uses the word 'advisers' in a loosey-goosey way," she said, suggesting that the FSI survey results were more indicative of the stance of the broker-dealer community.

The FSI's Paulitz, who has been directly involved in the group's polling, rejected that assertion, saying that nearly the entire survey population of financial professionals questioned were dually registered broker-dealers and investment advisers.

"I would say nearly all of them," he said. "It is the overwhelming majority."

Industry sources said that staffers on the Financial Services Committee have indicated that the panel plans to mark up the Bachus bill later this month. Marisol Garibay, a spokeswoman for committee Republicans, would not confirm a markup date ahead of a formal announcement.

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