Legislation to be introduced by Financial Services Committee Chair Spencer Bachus (R-Ala) would require investment advisers registered with the SEC and with state authorities to join a self-regulatory organization overseen by the SEC. The Investment Adviser Oversight Act would exempt from joining a registered national investment adviser association those advisers with assets under management 90 percent or more of which are, among others, attributable to non-US clients, clients that in the aggregate own not less than $25 million, in investments, venture capital funds, and 401(k) plans. But the exemption will not apply to any investment adviser that is registered as a broker-dealer under Section 15 of the Securities Exchange Act. The legislation does not designate any particular entity as a national investment adviser association.
The draft provides that an association of investment advisers may be registered as a national investment adviser association by filing with the SEC an application for registration in such form, and containing the rules of the association and such other infor1mation and documents, as the Commission prescribes as in the public interest or for the protection of investors. The SEC must approve the rules of the SRO. The SEC will also review the SRO’s disciplinary proceedings.
The legislation provides that creation of the SRO is contingent on the SEC determining that, among other things, the SRO’s rules assure a fair representation of the public interest and the investment adviser industry in the selection of its directors and the administration of its affairs and provide that a majority of its directors are independent of the industry. The SEC must also find that the SRO’s rules are designed to prevent fraudulent and manipulative acts and practices and provide for periodic examinations of members and associated persons. The rules must not impose any burden on the business of investment advisers or on their ability to compete in the market for financial services that is not necessary or appropriate in the public interest or for the protection of investors.
Section 914 of the Dodd-Frank Act required the Commission to review and analyze the need for enhanced examination and enforcement resources for investment advisers and report to Congress on regulatory or legislative steps necessary to address concerns identified in the study.
The SEC study mandated by the Dodd-Frank Act recommended users fees or an SRO as a way to enhance the effectiveness of the oversight of investment advisers. At a time when the Commission’s registered investment adviser examination program faces significant capacity challenges, the study recommended imposing user fees on SEC-registered investment advisers to fund an SEC examination program, authorizing one or more SROs to examine, subject to SEC supervision, all SEC-registered investment advisers, or authorizing FINRA to examine dual registrants for compliance with the Advisers Act. In a separate statement, Commissioner Walter supported the SRO option because it would have significant and long-term benefits to investors and the Commission, but she does not believe that there has to be a single SRO or that it has to be FINRA.
The study comes amidst a debate over whether FINRA could or should be an effective SRO for investment advisers. To deal with what FINRA has called an ``intractable resource problem,’’ FINRA has urged the SEC to seek legislation establishing an SRO for investment advisers to augment the government’s efforts in overseeing advisers.
In her statement, Commissioner Walter said that the SRO model should increase the frequency of examinations of investment adviser and thus directly answer the question that Congress posed to the SEC in Dodd-Frank. Moreover, an SRO would allow the SEC to transfer more of its resources in this area to complex and emerging issues at a time when they are most needed and permit the Commission to do its job with fewer but more expert resources. The SRO option would also add significant resources outside the Commission to support the agency’s mission and increase speed and efficiency through SRO processes that are more expedited than those used by the government. Significantly, noted the Commissioner, the user fee option does not necessarily provide any of these benefits.
Commssioner Walter also noted that, while the study raised the specter that the SRO model would undermine the expertise of SEC staff, ``that certainly does not have to be the case.’’ Indeed, the SRO would allow the SEC to do its job with a smaller examination workforce and, by eliminating the need to perform a large number of routine examinations, provide the opportunity for that smaller group to be more expert and experienced.