Chairman Bachus and Rep. McCarthy Propose Bipartisan Bill for More Effective Oversight of Investment Advisers
April 25, 2012 -
Financial Services Committee Chairman Spencer Bachus and Rep. Carolyn McCarthy, a member of the Committee, introduced bipartisan legislation today to create more efficient and effective oversight of the retail investment advisory industry.
Chairman Bachus and Rep. McCarthy introduced their proposal in response to a Securities and Exchange Commission (SEC) study that revealed the agency lacks resources to adequately examine the nation’s nearly 12,000 registered advisers. As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended a self-regulatory organization as one option for Congress to consider as it looks for ways to help the agency monitor the industry.
The Bachus-McCarthy bill would authorize one or more self-regulatory organizations (SROs) for investment advisers funded by membership fees.
Investment advisers and broker-dealers often provide indistinguishable services to retail customers, yet only 8 percent of investment advisers were examined by the SEC in 2011 compared to 58 percent of broker-dealers.
“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,” said Chairman Bachus. “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.
“Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change,” concluded Chairman Bachus.
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. Investment advisers that 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.
The legislation permits the SEC to suspend or revoke an NIAA’s registration, or censure or impose limits on an NIAA’s activities and operations, if the SEC finds that the NIAA has violated the Advisers Act, SEC rules or its own rules. The SEC would also be able to suspend or revoke an NIAA’s registration if the association has failed to enforce compliance with any provision by an NIAA member firm or associated person.
The proposal requires the SEC to determine whether an NIAA has the capacity to carry out the purposes of the Advisers Act and to enforce compliance by its members and their employees with the Advisers Act, the SEC’s rules, and the NIAA’s rules before the association can register as an NIAA.
The proposal also recognizes the authority given to the states over small investment advisers in Title IV of the Dodd-Frank Act by preserving state authority over investment advisers with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.
In addition, the SEC must determine that the NIAA’s rules:
- are designed to prevent fraud and protect investors;
- are consistent with the Advisers Act and fiduciary duties under the Act and state law;
- do not impose any burden on advisers that is not in the public interest or for investor protection;
- provide for periodic examinations of members and their related persons, and for coordination of those examinations with the SEC and state securities authorities;
- assure a fair representation of the public interest and the investment adviser industry in its selection of directors and administration of its affairs, and provide that a majority of its directors do not come from the securities industry; and
- provide for equitable allocation of dues and fees and establish appropriate disciplinary procedures for members and their associated persons that violate the Advisers Act, SEC rules or NIAA rules.
Click here to view a copy of the bill.
Key Leaders Agree an SRO Will Result in More Effective Oversight and Stronger Protection for Investors
SEC Chairman Mary Schapiro: “I think self-regulatory organizations, with close oversight from the federal government – can bring tremendous value to the protection of investors. So, it's an area we are willing to explore because even though our budget is growing, we're likely to never have all the resources we need to do everything that we'd like to do and the extent to which we can leverage SROs, accounting firms, whistleblowers, I am game to do that because I think it will allow us to do a better job.”
Testimony before the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, July 14, 2009
Former SEC Commissioner Roberta Karmel: “After the financial meltdown of 2008 and the Madoff bankruptcy, it would seem the height of political irresponsibility to allow the current inadequacies in the SEC’s examination capabilities to continue.”
New York Law Journal, June 16, 2011
Consumer Federation of America’s Director of Investor Protection Barbara Roper: “Having spent the better part of two decades arguing for various approaches to increase SEC resources for investment adviser oversight with nothing to show for our efforts, we have been forced to reassess our opposition to the SRO approach. Specifically, we have concluded that a properly structured SRO proposal would be a significant improvement over the status quo.”
Testimony before the Senate Banking, Housing and Urban Affairs Committee, July 12, 2011
SEC Chairman Mary Schapiro: “…we have to find a way to have better oversight of intermediaries who have such enormous interplay with retail investors, and an SRO is one of the vehicles to do that.”
Testimony before the House Financial Services Committee, September 15, 2011
Securities Industry and Financial Markets Association Chairman John Taft: “In the case of broker-dealers and independent investment advisers who provide personalized investment advice to retail customers, we believe comparable examination, oversight, and enforcement is most practically and readily achievable through use of an SRO.”
Testimony before the Subcommittee on Capital Markets and Government Sponsored Enterprises,
September 13, 2011
SEC Commissioner Elisse Walter: “We also have precedent, spanning more than seven decades, that SROs can significantly enhance the Commission’s examination and enforcement resources relating to its regulated entities … We need to address this issue now. It must not be relegated to another day—as has happened in the past. For far too long, in the investment advisory area, the Commission has been unable to perform its responsibilities adequately to fulfill its mission as the investor’s advocate, and investment advisory clients have not been adequately protected. This must change.”
Statement on Study Enhancing Investment Adviser Examinations, January 2011
House Budget Resolution FY 2012, Report 112-58: “During a time when trimming the deficit is imperative, the SEC should create headroom in its budget by streamlining and making more efficient its operations and resources; defraying taxpayer expenses by designating self-regulatory organizations (subject to SEC oversight) to perform needed examinations of investment advisors; and enhancing collaboration with other agencies, such as the Commodity Futures Trading Commission, to reduce duplication, waste, and overlap in supervision.”
Department of the Treasury: “Treasury notes the rapid and continued convergence of the services provided by broker-dealers and investment advisers and the resulting regulatory confusion due to a statutory regime reflecting the brokerage and investment advisory industries of decades ago. An objective of this report is to identify regulatory coverage gaps and inefficiencies. This is one such situation in which the U.S. regulatory system has failed to adjust to market developments, leading to investor confusion. Accordingly, Treasury recommends statutory changes to harmonize the regulation and oversight of broker-dealers and investment advisers offering similar services to retail investors. In that vein, Treasury also believes that self-regulation of the investment advisory industry should enhance investor protection and be more cost-effective than direct SEC regulation. Thus, in effectuating this statutory harmonization, Treasury recommends that investment advisers be subject to a self-regulatory regime similar to that of broker-dealers.”
Blueprint for a Modernized Financial Regulatory Structure, March 2008