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US bill seeks self-policing for investment advisers
April 25, 2012 / 9:21 PM / 6 years ago

US bill seeks self-policing for investment advisers

* 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 (Reuters) - 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 self-policing group.

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 member fees.

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 investment advisers.

“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 $510 million.

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)

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