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Committee Examines Bipartisan Bill to Protect Investors

Washington, Jun 5 -

The Financial Services Committee will meet on Wednesday to discuss bipartisan legislation designed to protect investors by increasing the examination rate of retail investment advisers.

The legislation, introduced by Chairman Spencer Bachus and Rep. Carolyn McCarthy, authorizes one or more self-regulatory organizations (SROs) for investment advisers. The establishment of one or more SROs is intended to augment and supplement the Securities and Exchange Commission’s oversight of investment advisers.

Currently, the SEC examines less than 10 percent of the nation’s 12,000 investment advisers each year.  The SEC has testified that 38 percent of investment advisers have never been examined.  The SEC has also said that even if the agency receives the full amount of funding it has requested for Fiscal Year 2013, the agency would still be unable to examine 89 percent of investment advisers.

“The investing public deserves more robust oversight and supervision of the professionals to whom they have entrusted their hard-earned money,” said Chairman Bachus.  “This bipartisan bill helps close what everyone agrees is significant gap in oversight, a gap that puts the average American investor at risk and undermines investor confidence.  The creation of one or more SROs will not only increase investor protection but also investor confidence.  This bill is a common-sense solution that ensures investors are better protected, bad actors are weeded out, and regulators are equipped to police the capital markets.”

Chairman Bachus and Rep. McCarthy introduced their proposal in response to a SEC study that recommended a SRO as one option for Congress to consider as it looks for ways to help the agency monitor the investment adviser industry.

The hearing will take place on Wednesday, June 6 at 10 a.m. in room 2128 Rayburn.

Summary of H.R. 4624:

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. 

H.R. 4624 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. 

H.R. 4624  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