This past Tuesday, the Capital Markets and Government Sponsored Enterprises Subcommittee (part of the Committee on Financial Services) held a hearing to discuss Rep. Bachus’ proposal regarding oversight of registered investment advisers (see “Rep. Bachus Circulating New SRO Draft”). The proposal calls for one or more self-regulatory groups to oversee retail advisers, under the authority of the Securities and Exchange Commission (SEC).
Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), said at Tuesday’s hearing that FINRA “would establish a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area.”
Ketchum also pointed to the proposal to bring advisers and broker/dealers under the same “standard of care,” and said it would be only logical for the same organization to be in charge of regulation: “In FINRA’s view, harmonization of the standard of care is an important first step. However, just as critical is a consistent oversight regime to ensure investors are being properly protected. As the SEC’s study noted, ‘to fully protect the interests of retail investors, the Commission should couple the fiduciary duty with effective oversight,’” Ketchum said at the hearing.
FINRA’s complete testimony is available here.
Opposition to FINRA oversight
Fiduciary360 (fi360), an organization for fiduciary education, said at the hearing that the SEC should be the sole body responsible for RIA oversight. "If there is any bright spot in this bill, it's that the proposed bill calls for more than one SRO, rather than just FINRA as the sole regulator," said Blaine Aikin, fi360's President and CEO. "However, we still believe that fully funding the SEC with enough resources to oversee the industry is the correct direction."
Also in opposition to the idea of an additional SRO for RIAs is the Financial Planning Coalition. It told Congress on Tuesday that the creation a new SRO for investment advisers is unneeded; would add a layer of regulation and costs that could be particularly burdensome for small business owners; and may not significantly improve protection for investors. The Coalition believes that supporting enhanced SEC oversight is the most appropriate solution.
The Coalition raised additional concerns with the proposed SRO legislation, including:
- The SRO would have jurisdiction over state-registered investment advisers. This would create an anomalous situation in which the SEC, which does not regulate state-registered advisers, would have oversight authority over an SRO that oversees state-registered advisers. This would impose an additional layer of regulation on state-registered advisers, with potentially conflicting rules and enforcement mechanisms between federal and state regulators.
- The SRO would have broad rulemaking and enforcement authority, yet neither Congress nor the SEC has recognized problems related to the SEC's ability to establish and enforce rules under the Advisers Act.
- The proposed rules of the SRO would not be subject to cost-benefit analysis or requirements under the Administrative Procedures Act.
- The SRO would not be required to be a transparent body, subject to the Freedom of Information Act (FOIA), the Sunshine Act, or other open government laws.
- The SRO is not required to provide its members with basic constitutional protections, such as due process rights.
- While the SEC has approval authority over the SRO's fees, there are no clear limits or restrictions on the structure or amount of fees, potentially creating an unlimited tax on investment advisers.
The Financial Planning Coalition’s testimony can be read here.