House Financial Services Committee Hears Arguments Over Who Should Oversee Investment Advisers

Last week, the House Financial Services Committee held a hearing about the Investment Adviser Oversight Act of 2012, a bill introduced by the committee’s chairman, Rep. Spencer Bachus (R-Ala.), and Rep. Carolyn McCarthy (D-N.Y.). The two lawmakers had come up with (HR 4624) because they believe that the US Securities and Exchange Commission, which has been supervising investment advisers, doesn’t have the resources to do this job effectively.

While there has long been discussion over this issue, the 2008 financial crisis and the discovery of Bernard Madoff’s multibillion-dollar Ponzi scam, which had been going on for years, served to some as evidence that the SEC wasn’t doing a thorough enough job of detecting financial fraud. Last year, the Securities and Exchange Commission issued a study acknowledging that its resources were limited. It too recommended that the Financial Industry Regulatory Authority or a new SRO be given the responsibility of overseeing investment advisers. Or, if it were to continue this oversight, then the Commission suggested that it work with an enhanced oversight program paid for with user fees.

While all sides involved in the debate are in agreement that registered investment advisers are not being examined on a regular basis, they can’t seem agree on how to make additional exams happen or on who should facilitate them. Unlike broker-dealers, investment advisers don’t have a self-policing group. They are usually examined by the states or the US.

The Securities Industry and Financial Markets Association, the National Association of Insurance and Financial Advisor, and the Financial Services Institute were among those that testified in support of a new SRO to oversee investment advisers. The North American Securities Administrators Association (NASAA) and the Investment Adviser Association are two of the opponents that want to keep the SEC and states in charge of investment adviser oversight.

Also, on May 29 the Project on Government Accountability wrote a letter to House Financial Services Committee leaders contending that nothing can replace having the government regulate investment advisers. POGO said that rather than giving private self-regulatory groups more authority, Congress should decrease the SEC’s reliance on SROs, enhance FINRA’s accountability and transparency policies, and give the SEC enough funding to make sure it can fulfill its responsibilities. POGO also foresaw potentially “serious conflicts of interest” if an SRO were given the job of investment adviser regulator.

The following day, in an e-mail to BNA, FINRA countered that POGO was disregarding the most key finding of the SEC’s study-that the Commission cannot properly examine and oversee the over 11,000 investment advisers in the US. FINRA wants to be the SRO that oversees investment advisers.

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Investment Adviser Oversight Act of 2012 (PDF)

POGO Tells Lawmakers It Opposes SRO Model for Investment Advisers, Bloomberg/BNA, May 31, 2012

At crucial hearing, deck will be stacked against SRO opponents, Investment News, June 5, 2012

More Blog Posts:
AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011