The House Financial Services Committee introduced legislation today that could pave the way for the Financial Industry Regulatory Authority (Finra) to become the self-regulatory organization for retail investment advisors.
Co-sponsored by committee Chairman Spencer Bachus (R-LA) and Rep. Carolyn McCarthy (D-NY), the bipartisan legislation would authorize one or more self-regulatory organizations (SROs) for investment advisors funded by membership fees.
Investment advisors and broker-dealers often provide indistinguishable services to retail customers, yet only 8 percent of investment advisers were examined by the SEC in 2011 compared to 58 percent of broker-dealers, according to a HFSC release.
"The average SEC-registered investment advisor can expect to be examined less than once every 11 years. That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable," Bachus said. "Bad actors will naturally flow to the place where they are least likely to be examined. Therefore, it is essential that we augment and supplement the SEC's oversight to dramatically increase the examination rate for investment advisors with retail customers."
"Customers may not understand the different titles that investment professionals use but they do believe that 'someone' is looking out for them and their investments. For broker-dealers that is true, but for investment advisors, it is all too often not true and that must change," Bachus said.
The legislation would amend the Investment Advisors Act of 1940 to provide for the creation of National Investment Advisor Associations (NIAAs), registered with and overseen by the SEC. Investment advisors 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 proposal requires the SEC to determine whether an NIAA has the capacity to carry out the purposes of the Advisors Act and to enforce compliance by its members and their employees with the Advisors Act, the SEC's rules, and the NIAA's rules before the association can register as an NIAA. The proposal also recognizes the authority given to the states over small investment advisors in Title IV of the Dodd-Frank Act by preserving state authority over investment advisors with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.
Finra and the Financial Services Institute (FSI) hailed the proposed bill as a step in the right direction for overseeing the industry. However, the Financial Planning Coalition (FPC)-consisting of the Certified Financial Planner Board of Standards, the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (Napfa)-strongly opposed the legislation, claiming that it would be costly and redundant.
Finra, the independent regulator for securities firms doing business in the U.S., in a prepared statement called the bill "an important and thoughtful effort to address a serious gap in investor protection. The bill recognizes the need for regular exams of investment advisors, while rightly focusing on retail accounts."
The FSI also lauded the legislation. "Hard-working American investors shouldn't have to be regulatory experts to know whether their financial advisor is getting the proper oversight needed to ensure they're protected," said FSI President and CEO Dale Brown in a prepared statement. "From a business standpoint, retail investment advisors have an unfair advantage over independent broker-dealers, who are examined by Finra every two years. It's time to protect investors and level the play field."
The FSI is an advocacy organization for independent broker-dealers and their advisors, with an estimated 100 broker-dealer members and over 35,000 financial advisor members.
FPC officials, meanwhile, denounced the proposed bill, claiming the legislation would be an ineffective and expensive way to police the financial services industry.
"While we agree with Chairman Bachus and Representative McCarthy that better oversight of investment advisors is needed, we oppose the legislation," the FPC, which represents about 75,000 financial advisors, said in a prepared statement. "As a recent Boston Consulting Group study found, outsourcing SEC oversight to a new SRO would be twice as expensive as directing adequate resources to the current SEC oversight program. Building on the SEC's existing infrastructure and experience is a better option than creating an added layer of regulation, and could be accomplished more quickly and effectively, and at far less cost."