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 US investors
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.