By Jim McConville
Coming up with a mutually agreeable way to monitor retail financial advisors may be truly a case of the devil being in the details.
While federal legislators and financial advisor industry officials are quick to agree that effective federal regulatory oversight of registered investment advisors (RIAs) is broken and needs fixing, they quickly take divergent paths when it comes to agreeing upon the specific regulatory mechanism to do the job.
The Committee on Financial Services today reopened debate on the proposed Investment Adviser Oversight Act of 2012 (H.R. 4624), or more commonly referred to as the Bachus Bill, holding a two and one half hour discussion that included testimony from six industry executives.
The Bachus Bill, sponsored by Financial Services Committee Chairman Spencer Bachus (R-Ala.) and New York Democrat Carolyn McCarthy, would authorize the Securities and Exchange Commission to create one or more self-regulatory organizations (SROs) to monitor and regulate financial advisors.
An SRO became a viable option, said Bachus, when it became evident that the SEC didn't have the financial wherewithal to do the job. In testimony to the committee earlier this year, the SEC reported that it had examined only eight percent of RIAs in 2011. The SEC also reported that nearly 40 percent of RIAs have never been examined.
The Dodd-Frank bill required the SEC to study the issue of whether it has enough resources to adequately examine RIAs. The SEC concluded that more resources are necessary, and recommended that Congress consider several options including an SRO like Finra, or have the SEC administer a user fee paid by advisors based on their size to help pay for more exam resources at the SEC.
Industry association response Wednesday to re-opening the bill -- and whether creating an SRO is the RIA monitoring solution -- was decidedly mixed.
The Financial Planning Coalition (FPC) argues that a single SRO will place financial burden on small- to mid-sized financial advisory firms that will now be subject to both federal and state oversight. The FPC includes members from the Certified Financial Planners Board, the Financial Planning Association, and the National Association of Personal Financial Advisors.
"It would single out small-business owners by imposing fees and regulatory burdens on mid- and small-sized advisory firms that are not imposed on large firms," said FPC officials in a letter submitted to the committee. "It would impose increased layers of regulation and cost on state registered investment advisers, and would discourage investment advisers from serving retail clients."
FPC officials say they support "a much less expensive" solution that would enhance the SEC's existing oversight program and allow it to examine all RIAs at least once every four years. The FPC would also support Congress granting the SEC the authority to assess user fees on all SEC-registered investment advisors.
David Tittsworth, executive director and vice president of the Investment Advisor Association, also suggested the committee consider implementing user fees assessed to advisors to cover regular SEC examinations rather than create another government oversight entity. Such SRO advisor oversight, said Tittsworth, means that smaller advisor firms would feel most of the financial bite, since under the Bachus bill some of the largest advisory firms would be exempt from SRO review.
Financial Services Institute (FSI) President and CEO Dale Brown told the committee that the group harbors no illusions that Finra would be the perfect RIA regulator, but it is the most practical solution in hand. The Washington, D.C., based-FSI represents an estimated 35,000 RIAs and more than 100 broker-dealers.
"The bill would shift the responsibility for investment adviser examinations from the SEC to an independent regulator paid for by the industry, not taxpayers," Brown said. "This would free the SEC to regulate the regulator, as it has done for decades for the brokerage and municipal securities industries, among others."
Brown acknowledged that there are many reasons for the current unacceptable regulatory gap. "But the question here today is: How do we close it? We believe HR 4624 is the best solution for this urgent investor protection problem."