Against the backdrop of Dodd-Frank mandated studies on the efficacy of an SRO to oversee investment advisers, the global hedge fund industry has raised the specter that delegating oversight to a SRO could impact the ability of US investment advisers to access European markets and use the management passport provided to third-country managers under the EU’s Alternative Investment Fund Managers Directive. In a letter to the SEC, the Alternative Investment Management Association also said that it is not clear if an SRO could inspect registered investment advisers outside the US who have US investors since SROs are not currently subject to memoranda of understanding with foreign market regulators. Moreover, there is no certainty that non-US regulators would agree to an include an SRO in the MOUs, leaving the SRO with no authority to operate outside the US. For these and other reasons, the association supports full oversight and regulation of investment advisers by the SEC
In addition, SROs for investment advisers do not exist in any other major financial jurisdictions, noted the association, and have been abandoned as a concept in a number of important hedge fund jurisdictions, including the United Kingdom. Indeed, the current trend globally in implementing new regulatory regimes appears to be moving away from reliance on third parties such as SROs and away from delegating important responsibilities to non-governmental bodies. For example, the Financial Stability Board, which has been tasked by the G-20 with helping to globally harmonize financial regulation, is skeptical of any reliance on or use of the work of third parties.
Further, the association said that the use of an SRO for investment advisers may give rise to a public impression that the industry is not properly regulated or overseen, leading to a lack of confidence in investors as to availability of proper protection. An SRO may also lead to duplicative regulatory requirements, which in turn may lead to confusion over which body has regulatory responsibility. An SRO would also place a disproportionate and unjustifiable cost on the advisory industry by membership fees and additional compliance costs, which may ultimately be borne by investors.