Legislation is currently pending in the U.S. House of Representatives that could dramatically change the regulatory landscape for registered investment advisers. On April 25, Financial Services Committee Chairman Spencer Bachus and Rep. Carolyn McCarthy introduced the Investment Adviser Oversight Act of 2012, which would authorize one or more self-regulatory organizations (SROs) to oversee advisers.
The legislation, which was first circulated last fall, was prompted by a 2011 Securities and Exchange Commission study that revealed the agency lacks resources to adequately examine registered investment advisers. The SEC examined only 8 percent of investment advisers in 2011; meanwhile, the Financial Industry Regulatory Authority examined 58 percent of broker-dealers.
“The average SEC-registered investment adviser 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,” said Chairman Bachus. “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 advisers with retail customers.
The legislation would specifically amend the Investment Advisers Act of 1940 to provide for the creation of National Investment Adviser Associations (NIAAs), registered with and overseen by the SEC. Investment advisers that conduct business with retail customers would have to become members of a registered NIAA, which is essentially a new term used to describe an SRO.
The Investment Oversight Act of 2012 requires the SEC to determine whether an NIAA has the capacity to carry out the purposes of the Advisers Act and to enforce compliance by its members and their employees with the Advisers Act, the SEC’s rules, and the NIAA’s rules before the association can register as an NIAA. The proposal would also leave small investment advisers with fewer than $100 million in assets under state oversight, so long as the state conducts periodic on-site examinations.
The reaction to the bill was swift. FINRA came out in support of the bill, which is no surprise given that it hopes to fill the role of the SRO. Meanwhile, the adviser community continues to speak out against the proposal.
David Tittsworth, executive director of the Investment Adviser Association (IAA), said that IAA “strongly opposes this ill-advised legislation that is intended to expand” FINRA’s jurisdiction. “Outsourcing the SEC’s critically important role in regulating and inspecting investment advisory firms is not the right solution, particularly when FINRA has demonstrated its lack of accountability, lack of transparency, and poor track record. The legislation also would force smaller businesses to bear the excessive costs of FINRA oversight.”
As we highlighted in a previous post regarding adviser oversight, 81 percent of advisors prefer an enhanced SEC exam model over FINRA as an SRO, while 75% of advisors said they would prefer a new SRO over FINRA even if it cost them more.
While the passage of the Investment Oversight Act of 2012 is uncertain, it could mean big changes for RIAs. A vote could come as soon as this month. Please stay tuned to this blog for further updates and analysis as the bill makes its way through the legislative process.
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