Bipartisan Bill Seeks Expanded Oversight of Advisers

The House Financial Services Committee  introduced legislation that would authorize one or more self-regulatory organizations (SROs) for advisers.




Chairman Spencer Bachus (R-Ala.) and Rep. Carolyn McCarthy (D-N.Y.) are co-authors of the Investment Adviser Oversight Act of 2012.

Investment advisers and broker/dealers often provide indistinguishable services to retail customers, yet only 8% of investment advisers were examined by the Securities and Exchange Commission (SEC) in 2011 compared with 58% of broker/dealers, the Committee noted.

“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,” Bachus said. “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 Financial Industry Regulatory Authority (FINRA) is in favor of the bill and said in a statement, “…. the current level of IA exams is unacceptable, and SROs can help fill this untenable gap in the protection of investment advisory clients.”

But advisers may not be in favor of FINRA as a regulator. “A recent investment adviser survey found that 80% of advisers would prefer SEC oversight to handing it over to FINRA,”  said Karen Nystrom, NAPFA’s director of public policy and advocacy at the National Association of Personal Financial Advisors.

The legislation would 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. Advisers who conduct business with retail customers would have to become members of a registered NIAA. The SEC would have the authority to approve the registration of any NIAA.