OPEN ACCESS: US investment advisers react to self-regulator proposal

Author: | Published: 1 May 2012
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Investment advisers have criticised a US House Financial Services Committee proposal to implement a self-regulatory organisation in the retail market.

The bill followed a US Securities & Exchange Commission (SEC) study released in January last year. In response to its Dodd-Frank mandate, the SEC found investment advisers are only examined about once every 11 years on average.

“We believe the solution [to the resource issue] is to give the SEC more resources,” Karen Bahr, general counsel at the Investment Advisers Association, told IFLR. “Investment advisers could pay user fees to the SEC to enhance the SEC’s examination program.”

The Investment Advisers Association testified on this issue before Congress in September of 2011. It is not the only financial adviser group to speak out against the bipartisan proposal.

The Financial Planning Coalition, an industry group that includes financial advisers, released a  statement in opposition to the bill on April 25. The group co-sponsored a study by the Boston Consulting Group (BCG) that found implementation of an SRO to cost twice as much as an adequately funded SEC.

“The Finra analysis didn’t provide much background on what went into their assumptions,” Daniel Barry, managing director of government relations and public policy at the Financial Planning Association, one of the members of the Financial Planning Coalition, said. “They simply assumed greater efficiencies than the BCG study.”

The cost estimates in the Boston Consulting Group study were much higher than estimates found in a study by the Financial Industry Regulatory Authority (Finra), the SRO responsible for oversight of broker dealers that is expected to be delegated authority over investment advisers if the bill is passed.

“The Finra analysis didn’t provide much background on what went into their assumptions,” Daniel Barry, managing director of government relations and public policy at the Financial Planning Association said. “They simply assumed greater efficiencies than the BCG study.”

“We need a better understanding on how Finra arrived at their conclusions.”

A Finra representative declined to comment on the proposal, but the regulator did release a statement.

"The bipartisan bill introduced today is an important and thoughtful effort to address a serious gap in investor protection. The bill recognises the need for regular exams of investment advisers, while rightly focusing on retail accounts,” according to the statement.

"As Finra has said, the current level of IA exams is unacceptable, and SROs can help fill this gap in the protection of investment advisory clients."

The Securities Industry and Financial Markets Association (Sifma) also supports an SRO for investment advisers, assuming the regulator is highly tailored.

A Sifma spokesperson was not successful in arranging a call with a representative.

“There’s a lot of concern that an SRO will come in and start doing oversight but not have the depth of understanding of an advisory or brokerage business [that the SEC does],” said Barry.

Implementation of a self-regulator was on one of the options the SEC outlined last year in its study on investment advisers and broker dealers, but its first choice was an increase in its own resources.

The financial sector agrees more oversight is required of investment advisers in the retail market, but is opposed in how that is to be done. The bill’s supporters in Congress are expected to receive a lot of pushback from investment advisers as the proposal moves along.