House Financial Services Committee Chairman Spencer Bachus (R-AL) and Rep. Carolyn McCarthy (D-NY), a leading member of the Committee, introduced bipartisan legislation to create a self-regulatory organization for the more efficient and effective oversight of the retail investment advisory industry. Chairman Bachus and Rep. McCarthy introduced their proposal in response to an SEC study that revealed the agency lacks resources to adequately examine the nation’s nearly 12,000 registered investment advisers. As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended a self-regulatory organization as one option for Congress to consider as it looks for ways to help the agency monitor the industry. The Bachus-McCarthy bill would authorize one or more self-regulatory organizations (SROs) for investment advisers funded by membership fees.
Investment advisers and broker-dealers often provide indistinguishable services to retail customers, noted the Chairman, yet only 8 percent of investment advisers were examined by the SEC in 2011 compared to 58 percent of broker-dealers. Noting that the average SEC-registered investment adviser can expect to be examined less than once every 11 years, Chairman Bachus said this level of oversight is not acceptable.
The Investment Advisers Oversight Act of 2012 would amend the Investment Advisers Act to provide for the creation of National Investment Adviser Associations (NIAAs), registered with and overseen by the SEC. Investment advisers that conduct business with retail customers would have to become members of a registered NIAA. The SEC would have the authority to approve the registration of any NIAA. The legislation also permits the SEC to suspend or revoke an NIAA’s registration, or censure or impose limits on an NIAA’s activities and operations, if the SEC finds that the NIAA has violated the Advisers Act, SEC rules or its own rules. The SEC would also be able to suspend or revoke an NIAA’s registration if the association has failed to enforce compliance with any provision by an NIAA member firm or associated person.
The legislation would require the SEC to determine whether an NIAA has the capacity to carry out the purposes of the Advisers Act and to enforce compliance by its members and their employees with the Advisers Act, the SEC’s rules, and the NIAA’s rules before the association can register as an NIAA.
The measure also recognizes the authority given to the states over small investment advisers in Title IV of the Dodd-Frank Act by preserving state authority over investment advisers with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.
Under the measure, the SEC must determine that the NIAA’s rules are designed to prevent fraud and protect investors; are consistent with the Advisers Act and fiduciary duties under the Act and state law; and do not impose any burden on advisers that is not in the public interest or for investor protection. The Commission must also determine that the SRO provides for periodic examinations of members and their related persons, and for coordination of those examinations with the SEC and state securities authorities. The SRO must also assure a fair representation of the public interest and the investment adviser industry in its selection of directors and administration of its affairs, and provide that a majority of its directors do not come from the securities industry. Finally, the SEC must assure itself that the SRO rules provide for equitable allocation of dues and fees and establish appropriate disciplinary procedures for members and their associated persons.