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Chairman Bachus Statement On Ensuring Appropriate Oversight Of Broker-Dealers and Investment Advisers

Washington, September 13, 2011 - Financial Services Committee Chairman Spencer Bachus made the following statement today during a Subcommittee hearing entitled “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight."

"Thank you, Chairman Garrett, for convening this important hearing to examine Sections 913 and 914 of the Dodd-Frank Act.  

"Section 913 of the Dodd-Frank Act gave the authority to, but did not require, the SEC to create a new standard of care for broker-dealers.  Even though the SEC has yet to provide Congress with any empirical data or economic analysis to justify a rulemaking on the standard of care for broker-dealers, the SEC’s apparent plan is to push forward with this rulemaking by recalling examiners and reassigning them to write these optional rules.  It is questionable whether the SEC should undertake a rulemaking for a new standard of care for broker-dealers at the expense of other statutorily-mandated rulemakings.  If the SEC decides, however, to issue a proposal to implement Section 913, it must act carefully and comprehensively to avoid disrupting an investor's relationship with his or her chosen investment professional.

"Furthermore, the Administration must coordinate disparate and potentially conflicting rulemaking efforts regarding the standard of care for investment professionals.  The Labor Department’s proposed rule to modify the existing definition of “fiduciary status” under ERISA appears to be moving forward even though it creates conflicting standards between advisers for investment accounts and advisers for retirement accounts and would make it illegal for swaps dealers to enter into swaps with retirement plans.  The SEC, CFTC and Labor Department must coordinate their efforts to minimize harm to investors.  The last thing our economy needs is additional disruption or elimination of financial products and services currently available to American investors. 

"Investment advisers and broker-dealers often provide indistinguishable services to retail customers, yet only 9 percent of investment advisers were examined by the SEC in 2010, compared to 44 percent of broker-dealers.  The Dodd-Frank Act did not fix this serious examination disparity.  Rather, Section 914 merely required the SEC to study how to improve investment adviser oversight.  The SEC staff proposed three options to address adviser oversight.  One of the options – imposing user fees – is unworkable and essentially amounts to an expansion of the SEC, which is in desperate need of fundamental reform, not increased responsibility.  A second alternative – allowing FINRA to examine dually-registered entities – would be a partial solution, however, stand-alone retail investment advisers examination rates would not improve In my view, the SEC staff’s third option – authorizing one or more self-regulatory organizations, or SROs, to examine SEC-registered investment advisers – would provide the most comprehensive and streamlined approach to increase investment adviser examination rates.  Therefore, I have prepared draft legislation that would authorize the creation of national investment adviser associations to register, examine, and discipline investment advisers to retail customers.

"Regardless of the standard of care, bad actors will naturally flow to a regime where they are least likely to be examined, and therefore, I think 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 as was the case with the Bernie Madoff Ponzi Scheme.  That must change. 

"I hope that my colleagues will support this legislation and that all interested parties will join the Committee’s effort to improve investment adviser oversight and enhance investor protection."

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