SEC Commissioner Pushes Back on Bachus FINRA Amendment to House Legislation

SEC Commissioner Luis Aquilar is deeply troubled by an amendment to the House Investor Protection Act that would transfer oversight of a substantial number of investment advisers from the SEC to an industry self-regulator, FINRA, which he describes as outsourcing regulatory responsibility from the SEC. In remarks at the Institute for Law and Economic Policy, the Commissioner was incredulous that House leaders would vote to outsource core functions of SEC oversight at the same time they are creating a new federal Consumer Financial Protection Agency to buttress protections for consumers. In his view, a government agency subject to Congressional oversight and multiple audits by agencies such as GAO is accountable in ways that an industry organization can never be. The Commissioner also said that the legislation is ``at war with itself’’ because other provisions enhance SEC investment adviser oversight. But he is buoyed by news reports that House Financial Services Committee Chair Barney Frank intends to strip the Bachus Amendment out of the legislation as it heads to the House floor.

Offered by Committee Ranking Member Spencer Bachus, the amendment would allow the SEC to permit or require FINRA to enforce compliance by its members and associated persons with the provisions of the Act. In other words, the amendment would empower FINRA to enforce the fiduciary duty provisions in the Investment Advisers Act against not only broker-dealer members but also against any affiliated investment advisory firm or any associated person. Additionally, the amendment would give FINRA sweeping rulemaking authority.

In a letter to the Committee, the financial planning industry expressed concern that the Bachus Amendment would extend FINRA’s authority to approximately 88 percent of investment adviser representatives and implicate application of the fiduciary duty to investment advice. The industry also claimed that the expansion of FINRA’s authority would be without precedent and the impact of this new oversight structure would be significant. For the first time, FINRA would be granted authority to regulate people and practices outside the scope of the Securities Exchange Act.

Commissioner Aquilar rejected the main argument in favor of putting oversight in the hands of an industry self-regulator, which is that the SEC lacks resources. The issue of resources masks the real situation, he said, since no private organization has the existing resources to expand investment adviser oversight. No one can suggest that FINRA will oversee advisers using the current budget and staff it has in place. Instead, the investment advisers will need to be assessed a bill for this additional oversight. And if advisers have to write a check to someone, he noted, it makes much more sense for that check to go to the SEC since the SEC already has the team and expertise in place. This issue really boils down to whether Congress is going to enhance the SEC by expanding its authority and fortifying its resources, including user fees from advisers, or weaken the SEC, by taking away its direct oversight in order to transfer it to an industry organization

The Commissioner assured state authorities that he continues to support the historic joint state-federal oversight of investment advisers. But injecting an industry organization into the mix dramatically changes the oversight structure in ways that do not make sense, particularly given the other provisions in the proposed legislation. The legislation would transfer oversight over a significant amount of advisers to the states by increasing the threshold requirement for federal registration as well as provides for user fees to pay for oversight. In his view, these two provisions taken together would significantly strengthen the SEC's oversight framework for advisers. Thus, he described the legislation as being "at war with itself" because of the significant transfer of oversight responsibility to FINRA.

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