* Would create self-regulatory scheme for retail advisers
* Larger advisers currently overseen by SEC, do not want SRO
* Bill sponsors say SEC not up to supervision task
* FINRA lauds House bill, financial planners pan it
By Sarah N. Lynch
WASHINGTON, April 25 U.S. House lawmakers on
Wednesday introduced legislation that would create a
self-policing body for retail investment advisers, a proposal
that the industry fiercely opposes as an unnecessary additional
layer of regulation.
House Financial Services Chairman Spencer Bachus, a
Republican, and Democrat Carolyn McCarthy said they introduced
the bill because the Securities and Exchange Commission lacks
the resources to effectively supervise investment advisers.
Unlike broker-dealers, which have the Financial Industry
Regulatory Authority (FINRA), investment advisers have no
The SEC has primary responsibility for overseeing
larger-sized advisory entities. In fiscal 2011 the agency was
only able to examine about 8 percent of investment advisers.
SEC Chairman Mary Schapiro told lawmakers in testimony on
Wednesday that about 40 percent of registered investment
advisers have never been examined by the SEC.
Bachus said the SEC clearly is not up to the task,
especially after it for years missed Bernard Madoff's $65
billion Ponzi scheme.
"Bad actors will naturally flow to the place where they are
least likely to be examined," Bachus said. "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 investment advisory industry, for its part, has
historically preferred to have the SEC as its primary overseer
rather than a self-regulatory organization (SRO).
"Outsourcing SEC oversight to a new SRO would be twice as
expensive as directing adequate resources to the current SEC
oversight program," said the Financial Planning Coalition in a
statement responding to the bill on Wednesday.
FINRA, which has advertised its desire to serve as an SRO
for investment advisers, lauded the legislative.
The bill "is an important and thoughtful effort to address a
serious gap in investor protection," it said in a statement.
"The bill recognizes the need for regular exams of investment
advisers, while rightly focusing on retail accounts."
The 2010 Dodd-Frank Wall Street reform law did not address
what to do about investment adviser oversight. It instead asked
the SEC to conduct a study exploring the possible options.
Early last year, the SEC laid out three potential courses of
action for Congress: imposing user fees on the industry to help
fund SEC oversight, designating a self-regulatory group for
advisers, or authorizing FINRA to examine advisers who are
dually registered as broker-dealers.
The Bachus-McCarthy bill would amend the law to create one
or more National Investment Adviser Associations funded by
Investment advisers that do business with retail customers
would have to become members of a self-regulatory body, and the
SEC would have oversight of the new self-regulatory scheme.
David Tittsworth, executive director for the Investment
Adviser Association, said the bill is a blatant attempt to try
and give FINRA the authority it needs to expand its turf to
"Outsourcing the SEC's regulatory and oversight authority to
FINRA is not the right solution," he said in an e-mail.
"FINRA has demonstrated a lack of accountability and
oversight, as well as a questionable track record. The
legislation would burden smaller investment advisory businesses
with FINRA's excessive costs."
FINRA has argued that the costs of starting a new SRO are
far lower than some have feared.
FINRA said a prior study by Boston Consulting Group found
that it would cost $200-$255 million to start up an SRO for
investment advisers. Ongoing costs would range between $460 to
FINRA said its own calculations found that the start-up cost
would be $12 to $15 million. Afterwards, ongoing costs would
range between $150 to $155 million a year, FINRA said.
(Reporting By Sarah N. Lynch; Editing by Andrew Hay)