Hearings conducted by the House Financial Services Committee on the Investment Advisers Oversight Act, HR 4624, revealed a growing bi-partisan consensus in Congress that investment adviser oversight must be increased through establishing an SRO for advisers. HR 4624 is sponsored by Committee Chairman Spencer Bachus (R-AL) and co-sponsored by Rep. Carolyn McCarthy (D-NY).
Noting that SEC-registered investment advisers are generally inspected once every decade, Chairman Bachus said that investor protection requires more timely oversight of investment advisers. He noted that HR 4624 closes a glaring regulatory gap that undermines investor confidence. One of the tenors of the Dodd-Frank Act is that the inadequate oversight of investment advisers is a weakness of the current financial regulatory system, he noted.
The Dodd-Frank Act Section 914 mandated an SEC staff study, which resulted in the SEC offering Congress three options: 1) authorize the SEC to impose user fees on SEC-registered investment advisers to fund their examinations by the SEC’s Office of Compliance Inspections and Examinations; 2) authorize one or more SROs to examine, subject to SEC oversight, all SEC-registered investment advisers; or 3) authorize FINRA to examine dual registrants for compliance with the Investment Advisers Act. In the Chairman’s view, of the three, an SRO for investment advisers is the most comprehensive and streamlined approach to address the regulatory weakness.
Chairman Bachus pledged to work with anyone who has an idea on how to improve the bill. Specifically, he acknowledged that some people are concerned about certain exemptions in the bill. Chairman Bachus is ready to work with people on that issue. He added that it is a sobering thought that unless something changes
face another Madoff scandal.
Both Chairman Bachus and Ranking Member Barney Frank (D-MA) emphasized that state regulation is very important in this area. While Congress has given federal statutory authority to the SEC, said Rep. Frank, the states should fully participate in the oversight of investment advisers. Rep. Frank specifically praised the work being done by Massachusetts Securities Commissioner William Galvin, while Chairman Bachus praised the work that Alabama Securities Commissioner Joe Borg has been doing.
Also praising Mr. Galvin, Rep. Stephen Lynch (D-MA) said that this legislation is about the integrity of the financial services industry. He said that HR 4624 is a thoughtful approach to regulation. He acknowledged that a new SRO may have an impact on small investment advisers overseen by state regulators. He noted that HR 4624 could do a better job of protecting state regulation.
In his testimony, Texas Securities Commissioner John Morgan asked that state-regulated investment advisers be excluded from the federal legislation. While state securities regulators share the Committee’s concern regarding the oversight and examination of federally registered investment advisers, said Mr. Morgan, and fully appreciate the improvements that the Chairman and Rep. McCarthy have made to the bill since a discussion draft was made public last fall, notably, in the independence of the SRO’s governance structure, the sharing of information between the SROs and government regulators and the non-preemption language, NASAA still remains strongly opposed to H.R. 4624 in its present form, without significant changes. He said that H.R. 4624 would subordinate state regulators to an SRO, impose redundant regulation and new costs on small and mid-size investment advisers, and very likely put many of the small state-regulated firms out of business.
His concerns were shared by Rep. Ruben Hinojosa (D-TX), who noted that small investment advisers would be subject to new expenses for regulatory oversight, raising the specter of a duplicate layer of regulation. Congress must ensure that additional fees do not put small advisers out of business, he stressed.
Chairman Bachus reiterated that state securities regulators have done an exceptionally good job and that Congress is sensitive to state regulation and will not preempt the ability of states to regulate in this area. He said that Congress will not unnecessarily burden investment advisers with duplicative regulation, but emphasized that they do need to be examined.
Responding to concerns that the bill would add expenses for some investment advisers, the Committee Chair said that he is open to an amendment to the bill providing for a de minimis fee or a credit for states with a vigorous program of investment adviser oversight and inspection. But the Chair added that many states are not funding regulation of investment advisers at the level of
Texas. FINRA CEO Richard Ketchum said that
FINRA would support an amendment to HR 4624 providing for a de minimis SRO fee
for smaller firms subject to robust state regulation.
Rep. McCarthy, a co-sponsor of HR 4624, emphasized that the states will still have oversight. She described the oversight of investment advisers as a state-federal partnership. Congress will work with the states, she averred. Rep. McCarthy asked Mr. Ketchum how FINRA would cooperate with state securities regulators if FINRA is designated the SRO. Mr. Ketchum said that HR 4624 specifically addresses this concern and provides comfort on the interaction of the SRO and state regulators. He said that the annual meetings built into the legislation would be treated like the current 19(c) meetings with the SEC. Mr. Ketchum pledged that FINRA would approach these meetings as a collegial opportunity to share information and, more broadly, promised to work closely with the states.
Mr. Ketchum was referring to Section 19(c) of the Securities Act, which requires the SEC to hold an annual meeting to maximize uniformity in federal and state securities regulation and effectiveness of regulation while, at the same time, reducing costs and paperwork for issuers and minimizing interference with capital formation
In order to foster cooperation between the new national investment adviser SRO and state securities regulators, HR 4624 mandates the SRO to conduct an annual conference as well as such other meetings as are determined necessary, to which representatives from the state securities administrators association and the SEC must be invited to participate.
Rep. Carolyn Maloney (D-NY) raised the issue of the cost-benefit analysis of FINRA rules and transparency generally, noting that FINRA is not subject to the Administrative Procedure Act. While acknowledging that FINRA is not subject to the APA, Mr. Ketchum emphasized that FINRA rules are subject to SEC approval and, as such, are published and open for public comment.
Chairman Bachus noted that the legislation requires the investment adviser SRO to explain in its public filing with the SEC the nature of comments that it received, including those from the industry or consumer groups, concerning the potential costs or benefits of a proposed rule and must provide a response to those comments in its SEC filing, including an explanation of any amendments to the proposed rule that were made in response to those comments and a description of significant alternatives to the proposed rule that were suggested and the reasons that the SRO did not propose them. Essentially, said Chairman Bachus, the SRO will have to disclose why it is adopting or rejecting the cost-benefit recommendations, and the specific reason why it rejected the cost-benefit suggestions. If this provision is not tight enough, said Chairman Bachus, the committee will work with any group that has a suggestion for tightening it.
In his prepared testimony, FINRA CEO Ketchum said that H.R. 4624 represents a direct, bipartisan response to the SEC’s study and recommendations, and is an important and thoughtful effort to help fill the gap in the protection of investment advisory clients. Specifically, the legislation addresses the current lack of Commission resources and allows self-regulatory organizations registered with and subject to strict SEC oversight to assist government regulators in providing closer and more regular oversight of investment advisers who serve predominantly retail investors.
The securities industry also supports the legislation. SIFMA Chairman-Elect Chet Helck said that HR 4624 would result in enhanced oversight of retail investment advisers and thereby better serve and protect individual clients. The legislation would not foist new regulatory oversight on retail investment advisers, he opined, but rather would restore the oversight that is already supposed to be happening but is not, while relieving pressure on the limited examination resources of the SEC.