Does your congressman know how an SRO would make your life more difficult? Did you tell him?
The best way to get a politician's attention is often through his constituents.
So when Donald Rice, president of Money Management Services Inc., a registered investment adviser in Birmingham, Ala., found out that his congressman, Rep. Spencer Bachus, planned to introduce a bill that Mr. Rice felt would hurt his business, he contacted the legislator.
Mr. Bachus, chairman of the House Financial Services Committee, is expected to introduce a bill soon that would create a self-regulatory organization for investment advisers.
Riffing on a theme that is dear to Mr. Bachus' Republican Party, Mr. Rice made the case to him in a recent meeting that the vast majority of RIAs are small businesses and that they would be hurt by an SRO.
“We had to explain to him what an RIA was and that 90% of them were like me,” Mr. Rice said Wednesday at a conference in Coral Gables, Fla., sponsored by MarketCounsel, a regulatory compliance consultant.
The notion of an SRO is anathema to most investment advisers, who want the Securities and Exchange Commission to remain the regulator of the advice sector.
Mr. Bachus' proposed legislation is intended to strengthen adviser oversight. Currently, the SEC examines annually only about 9% of the nearly 12,000 advisers registered with the agency.
Advisers fear that if an SRO were legislated, it would turn out to be the Financial Industry Regulatory Authority Inc., the agency that currently regulates brokers. Advisers claim that Finra doesn't have the experience or expertise to serve as their SRO.
Finra has been lobbying Congress in favor of an adviser SRO and is suggesting that it would be well-positioned to assume the role.
Brian Hamburger, founder and managing director of MarketCounsel, expressed optimism that advisers' qualms about an SRO are getting through to Mr. Bachus. He noted that Larry Lavender, chief of staff for the House Financial Services Committee, is scheduled to attend the MarketCounsel conference Thursday.
Mr. Hamburger hopes that Mr. Lavender's visit to the MarketCounsel conference is a sign that Mr. Bachus is open to modifying his SRO proposal before it becomes a formal bill.
“They continue to seek out the best solution out there,” Mr. Hamburger said. “There's been some really meaningful dialogue that we've had between us. I have to believe [Mr. Lavender's visit] is more than a charade. If [a bill] is written already, why bother?”
The draft SRO proposal caters to Finra, according to Mr. Hamburger.
“It looks, smell, feels like Finra,” Mr. Hamburger said. “It can only be Finra. They might as well say the organization rhymes with ‘minra' and begins with an F.”
Finra did not respond to an inquiry about the status of its lobbying in favor of the SRO proposal. The organization repeatedly has tried to allay adviser concerns by asserting that it would establish a separate governance structure for advisers that would be sensitive to the characteristics of the adviser business model.
State securities regulators have criticized the SRO draft proposal for not being clear enough in delineating the state role in adviser oversight. The proposal would put advisers under an SRO overseen by the SEC.
But that doesn't account for 3,200 advisers that manage under $100 million of client assets that will be coming under the jurisdiction of state regulators next June under a provision of the Dodd-Frank financial reform law.
“Finra needs to report to the states somehow,” Joseph Borg, Alabama's securities commissioner, said at the MarketCounsel meeting.
As Mr. Bachus develops his SRO proposal into a bill, its legislative path is not clear. With a strong Republican majority in the House, it's likely that the measure will gain approval on that side of Capitol Hill.
But like many bills over the past few years, it could be headed for a Senate graveyard.
Senate Banking Committee Chairman Tim Johnson, D-S.D., is maintaining his distance.
“Sen. Johnson believes the issue deserves further exploration before moving forward with any legislative proposals,” committee spokesman Sean Oblack said in a statement.
Republicans on the panel are waiting to see what transpires in the House.
“It doesn't look as if the Senate will take up this issue anytime soon,” said David Tittsworth, executive director of the Investment Adviser Association. “I certainly get the sense they're moving slower and deliberately.”
