November 25, 2010 / 6:39 PM / 9 years ago

Investment advisers to SEC: we don't need new cops

NEW YORK (Reuters) - The battle over whether FINRA, the private company that regulates U.S. brokerages, should also supervise investment advisers is escalating.

Among the changes prompted by the financial crisis and the Bernard Madoff fraud, the Securities and Exchange Commission is studying how it can improve the examination of investment advisers including hedge fund managers and mutual funds.

With a budget set by Congress, the SEC examines less than one in 10 of the 11,681 advisers under its bailiwick a year.

The Financial Industry Regulatory Authority, a private company founded by brokers to oversee brokers, urged Congress to authorize a self-regulatory organization to police advisers. Its prime candidate for the job? Itself.

That does not sit well with advisers, a group that — unlike brokers — is beholden to a fiduciary standard and does not charge commissions.

When the SEC issues a report in January, advisers and others worry it will make FINRA the cop on the beat.

“There is a lack of public accountability at FINRA, a lack of transparency and a less-than-pristine track record when it comes to their responsibility over brokers,” said Investment Adviser Association Executive Director David Toothwort.

This week, that association and the North American Securities Administrators Association, a coalition of state regulators, sent letters to the SEC urging the agency not to designate a self-regulatory organization for advisers.

These groups, as well as lobbies for hedge funds and mutual funds, want to see government oversight bolstered by more resources, such as self-funding through user fees.

“The SEC has a lot more experience with a principles-based regulatory model, which is different than the rules-based model used with brokers,” Toothwort said. The government agency is also accountable to Congress and more transparent, he said.

FINRA, in a November 2 letter from Chief Executive Richard Ketchum, said the SEC’s best option is to establish “one or more” self-regulatory organizations. That, Ketchum said, would “ensure a dramatic increase in the frequency of examinations.”

FINRA this week said investment advisers and NASAA officials are not facing the facts.

“Neither letter addresses the reality that the SEC, by its own admission, can only examine about 9 percent of investment advisers in 2011,” said FINRA executive vice president Howard Schloss.

The SEC relies on taxpayer funds, which means that expanding the agency will be difficult. There have been many efforts asking Congress to let the SEC fund itself by charging user fees and keeping penalties, but all fell short.

FINRA’s critics are less concerned with exam frequency as with the quality of the supervisor.

Oversight “should not be outsourced to a private, third-party organization that does not have expertise or experience with investment adviser regulation,” David Massey, NASAA’s president, said in his letter this week.

Massey said the SEC ought not select a regulator with an “opaque” structure, lacking public accountability and prone to conflicts of interest — a thinly veiled jab at FINRA.

He also said the number of investment advisers supervised by the SEC under a new financial system overhaul law would fall by 4,000, or about 36 percent, as firms with less than $100 million are shifted to their respective states.

Reporting by Joseph A. Giannone. Editing by Robert MacMillan

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