Adviser SRO: It could be the SEC after all

The Investment Adviser Oversight Act of 2012 appears to be in trouble. Support for the bill seems tepid at best on both sides of the aisle. The more members of Congress hear about possible Finra oversight of advisers, which is what the current form of this bill would mean, the less they like it. Introduced by House Financial Services Committee Chairman Spencer Bachus, R-Ala., the bill is a bad approach to a real problem. Both sides agree with Mr. Bachus' statement that “it is essential that we augment and supplement the SEC's oversight to dramatically increase the examination rate for investment advisers with retail customers” to improve investor protection. But what opponents of the Bachus bill have been saying all along — and now seems to be catching on — is that the best way to do this isn't to shift responsibility to a new regulator but to give the SEC the financial resources necessary to do the job. An acceptable self-regulatory organization should be accountable to Congress and the public, required by law to be transparent, experienced in performing the task required, economical to operate and free from inherent conflicts of interest. The SEC possesses all these qualities, the Financial Industry Regulatory Authority Inc. none of them. The SEC solution to this point has suffered in the anti-big-government environment. A policy to increase funding for a beleaguered regulator has been viewed as a nonstarter and politically untenable, especially for Republicans. But that superficial analysis fails to see the hypocrisy in appointing Finra in the hope that it can be a more cost-effective — let alone effective — solution. REDUNDANT AND EXPENSIVE In reality, it is the Finra-as-SRO approach that is inconsistent with the imperative for efficiency. It would add a redundant and expensive layer of bureaucracy. The lines between state and Finra regulators would be fuzzy, Finra would collect fees from both state- and Finra-regulated advisers, and the SEC would have to ramp up its oversight of Finra. The result would be regulatory confusion with higher overall costs. With the effect on jobs and protecting Main Street also thematic considerations of any new legislative action, the Finra-as-SRO approach puts many small businesses (which most advisory firms are) at risk. The Bachus bill would extend coverage exemptions to many of the biggest advisers, putting the expected high costs of Finra oversight on a reduced base of mostly small advisers. Finra's only perceived benefit over the SEC is not being a line item on the federal budget, but even that is tenuous compared with the ideal solution of letting the commission's examination program become self-funded through user fees. The SEC already collects fees from advisers, but rather than go directly to its budget, the fees are returned to and managed by Congress, which sets that budget. This arrangement has long had a deleterious effect on the SEC. Under the capable direction of David Tittsworth, the Investment Adviser Association is playing a leading role in the push to prevent Finra from taking the reins of regulatory control over advisers, as well as to provide the SEC with clear responsibility and a stable funding source. His testimony at the June 6 House Financial Services Committee hearing on the Bachus bill is required reading for anyone who wants to truly understand this issue and how it should be addressed. Rep. Maxine Waters, D-Calif., has introduced competing legislation consistent with the approach outlined by the IAA. The problem is that in a Republican-controlled House and a fractured political environment, it will be difficult for popular support to emerge for a Demo- cratic proposal opposing that of the Republican chairman. It would be more realistic for the Bachus bill to continue in name but be amended with SEC-centric language. Given the lopsided advantages of the SEC solution and the growing realization that the philosophical distinction between the alternatives is illusory, this might not be as far-fetched as once thought. Powerful forces are trying to advance the Bachus bill. Brokerage and insurance trade groups are deploying their deep pockets and laserlike focus to support what they view as best for their members. By pressing for SEC self-funding, consumer protection and advisory groups have the opportunity to achieve a lasting bipartisan solution that puts the emphasis where it belongs: on the public's best interests. Blaine F. Aikin is chief executive of fi360 Inc. and a member of the steering committee for The Committee for the Fiduciary Standard.