House Democrats Pan Proposal for Policing Investment Advisers

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WASHINGTON — House Democrats on Wednesday took aim at a controversial bill that would establish a self-regulatory organization to oversee retail investment advisers, raising a litany of concerns about the impact on small investment practices and diminishing the roles of existing federal and state authorities.

The Investment Advisers Oversight Act, sponsored by Financial Services Committee Chairman Spencer Bachus, R-Ala., and New York Democrat Carolyn McCarthy, would direct the Securities and Exchange Commission to recognize one or more SROs to police the sector.

The push for the bill comes out of the consensus recognition that the SEC, at its current level of funding, cannot shoulder the burden of effectively regulating investment advisers. By the agency's own count, its examiners only evaluated 8% of advisers in 2011, while 40% of firms in the fast-growing sector have never been evaluated at all.

Barney Frank, D-Mass., the ranking member of the Financial Services Committee, said that before creating a self-regulating body, Congress should consider increasing funding for the SEC. "The very fact that we're considering an SRO argues strongly against the inadequate funding this Congress has given the SEC," he said at a hearing on the Bachus bill.

Frank cited the recent hit that JPMorgan Chase (JPM) took from risky trades that had gone sour. The $2 billion-plus loss that the firm reported would more than cover the budgets of the SEC and the Commodity Futures Trading Commission, Frank said, arguing that the Bachus bill would strip the federal regulators of their proper oversight authority at a time when their role needs to be expanded.

It was the 2010 Dodd-Frank Wall Street reform bill that Frank, then the chairman of the Financial Services Committee, helped push through the House that directed the SEC to conduct a study evaluating the regulatory landscape of the adviser industry. The agency included in its recommendations congressional action to deliver additional resources for it to increase its own investigations or, alternatively, to cede oversight to a self-regulatory organization as the Bachus bill would direct.

Echoing Frank's concerns about self-regulatory organizations, Maxine Waters, D-Calif., announced Wednesday that she is in the process of drafting legislation that would empower the SEC to collect user fees from advisers that would in turn be used to fund additional examinations.

That approach is supported by certain industry groups, including the Investment Adviser Association and the Certified Financial Planner Board of Standards. But some supporters of the Bachus bill argue that strengthening the role of the SEC is a political dead end. Count among those original co-sponsor McCarthy, a Democrat, who said of additional SEC funding, "I would love to, but it's just not going to happen."

The Financial Services Institute has taken that position, tepidly endorsing the Financial Industry Regulatory Authority, or FINRA, the self-regulatory body that oversees broker-dealers, to expand its role cover investment advisers.

But the Bachus proposal has also drawn sharp opposition from state regulators, who see in FINRA an additional layer of regulation that would adversely affect smaller investment firms currently regulated by the states, many of whom might close up shop if they were forced to pay membership fees to FINRA or another SRO, according to Texas Securities Commissioner John Morgan, who testified on behalf of the North American Securities Administrators Association.

The bill "would require firms already well regulated by the states to become members of a self-regulatory organization," said Morgan, who cited a high rate of adviser examinations reported by state authorities. "That is not necessary. There is no regulatory gap there."

Morgan indicated that his group would not oppose the bill if language concerning state-regulated advisers were dropped.

"State regulators have done an exceptional job," Bachus said, noting that his bill is actually projected to expand the oversight role of the states, bringing an estimated 7,000 more advisers under the purview of authorities at that level, though they would still be required to register with the SRO. "We want to be very sensitive to the state regulators," Bachus said, adding that he expects his committee to consider an array of amendments when the bill comes up for a markup.

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