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Chairman Bachus: Bipartisan Bill Closes Oversight Gap That Puts Investing Public at Risk

Washington, June 6, 2012 -

Financial Services Committee Chairman Spencer Bachus on Wednesday delivered the following statement at a hearing on the "Investment Adviser Oversight Act of 2012," bipartisan legislation he has introduced to improve investor protections.

"This morning the Committee will examine bipartisan legislation, the Investment Adviser Oversight Act, that Congresswoman McCarthy and I introduced to protect investors. 

"In September, the Subcommittee on Capital Markets held a hearing on a draft version of this bill, and I thank both proponents and opponents of the bill who offered constructive suggestions.

"While the average American investor may not understand the different titles that investment professionals use, they do believe there is a reasonable level of oversight designed to protect their investments from fraud.  For broker-dealers, that reasonable level of oversight exists.  Broker-dealers face routine examinations on a regular and consistent basis.  But the average investment adviser is examined only once a decade.  Even worse, the Securities and Exchange Commission reports that an astounding 38 percent of investment advisers have never been examined – not once!

"The investing public deserves more robust oversight of these professionals to whom they have entrusted their hard-earned money – certainly more oversight than the public received in the Madoff case and the very recent case of financial adviser Matthew D. Hutcheson, who was known as 'America’s Retirement Coach,' and the indictment of Mark Spangler, a former chairman of the National Association of Personal Financial Advisors.  This bipartisan bill helps close what everyone agrees is a glaring regulatory gap – a gap that puts the average American investor at risk and undermines investor confidence.

"The Dodd-Frank Act recognized that inadequate investment adviser oversight is a weakness of our system.  The SEC study mandated by section 914 of Dodd-Frank presented Congress with three options.  One of them – authorizing one or more self-regulatory organizations, or SROs, to examine investment advisers – is, in my opinion, the most practical, comprehensive and streamlined approach to address this weakness.  But, this is not the only possible solution.  Obviously, two other options were offered by the SEC.

"But as SEC Chairman Mary Schapiro herself stated before this Committee on April 25, and I quote:  'The ability to leverage a SRO organization is really critical….Look at our numbers. We examine about 8 percent to 9 percent of investment advisers every year.'  The Consumer Federation of America also stated in testimony that a SRO would be – and I quote – 'a significant improvement over the status quo.'

"Some others have said that more funding for the SEC is the answer.  But the SEC itself has admitted that even if the agency receives the full amount of funding it has requested for 2013, it would be able to examine only 1 in 10 investment advisers. 

"Understandably, many investment advisers are not enthusiastic about increased oversight.  No one is excited when the SEC or any regulator, for that matter, schedules an exam.  But when fraud occurs and investors are harmed, outrage, bewilderment and astonishment follow, and members of Congress – and the public – then properly and predictably ask, 'Where were the regulators?'

"As I have said repeatedly since discussion of this bill began, I stand ready to work with anyone who has an idea on how to improve it.  For example, some have expressed concerns about the exemptions in this bill, and I am more than willing to work with any Member or interested stakeholder to address those concerns and thereby achieve our objective of protecting retail investors who use the services of investment advisers.

"The only goal of this bipartisan bill is to deter bad actors and help protect American investors.  I see no way to do that without timely examinations.  The debate over who conducts these examinations and how is open to debate, a debate that we continue today with this hearing.

"I hope my colleagues will support this bipartisan bill that Mrs. McCarthy and I have proposed.  But if they do not, I hope they will at least offer constructive suggestions on how to improve it, or craft their own solution and present it for debate.

"Until something changes, American investors are at risk of another Madoff scandal.  That ought to be a sobering thought not only for this Congress, but for investment advisers as well." 

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