A bill to create a self-regulatory organization for investment advisers, which was supposed to be introduced this month, won't be ready until the spring, proof to opponents of the bill that their objections are gaining traction with Capitol Hill lawmakers.
Formal legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to another entity such as the Financial Industry Regulatory Authority Inc. won't be introduced for several months, according to an aide to House Financial Services Committee Chairman Spencer Bachus, R-Ala.
At a mid-September hearing, he released a draft bill that would authorize one or more SROs to oversee investment advisers. It was widely expected that a formal measure would emerge this month.
Now legislation will “probably not be introduced until next spring,” Jeff Emerson, deputy chief of staff for communications on the Financial Services Committee, wrote in an e-mail. “The timing of a markup has not been determined yet.”
One SRO opponent welcomed the delay in the legislative process.
“We had expected to see another draft before the end of the year,” said David Tittsworth, executive director of the Investment Adviser Association. “Anything that keeps the bill from moving is relatively good news.”
One of Mr. Bachus' constituents, who has been cautioning him about the drawbacks of an adviser SRO, said that congressman is hesitating because of investment adviser concerns.
“What it indicates is that a certain amount of information has been able to get to Chairman Bachus that this is not a slam-dunk situation — that Finra is not the best SRO for the small investment advisers,” said Donald Rice, president of Money Management Services Inc.
Financial advisers are wary of Finra because they say that it lacks the expertise to enforce the fiduciary standard to which advisers must adhere.
Finra's “check the box” mentality and inclination to slap fines on firms for technical infractions would hit small advisory operations particularly hard, according to Mr. Rice.
By focusing on small businesses, he is stressing a theme that often resonates with Republicans.
The central message, according to Mr. Rice, was that Mr. Bachus and his staff “had to think the whole thing through before they just threw some bill out there.”
Finra, which has been pushing to be named the SRO for advisers, maintains that it would set up a separate governance structure for advisers that would be sensitive to the sector's characteristics.
NO TECHNICAL VIOLATIONS
“It's simply not true that we're looking to write people up for technical violations,” Finra chief executive Richard G. Ketchum said.
“We're very conscious of the range of small-firm business models that exist on the adviser side,” he said. “We think the right way to approach an exam program for advisers is from a risk-based standpoint.”
The House financial panel also has heard from state securities regulators, who worried that an SRO would usurp their authority.
“We think state regulatory oversight of these small advisers is absolutely critical,” Mr. Ketchum said. “We would only support legislation that makes it clear that an SRO supplements, and was never in-tended to supplant, state regulation.”
A Finra official said that the regulator isn't worried about the elongated timeline for an SRO bill.
“It is our understanding that the timing is not indicative in any way that Chairman Bachus is losing interest,” said a Finra official, who declined to be identified discussing its legislative efforts. “There's a lot on the calendar.”
A leading SRO advocate, who favors Finra's filling the role, said that Mr. Bachus' proposal remains the best idea for strengthening adviser oversight and investor protection.
“We are never surprised by delays in the legislative process, as they are inevitable,” Dale Brown, president and chief executive of the Financial Services Institute Inc., said in a statement. “Momentum is not only still in favor of Chairman Bachus' SRO bill, but it's growing, because it is the only viable solution to a growing problem.”
Even if the bill is introduced, Mr. Bachus and his allies will have to overcome major obstacles, such as opposition from the House financial panel's ranking Democrat, Rep. Barney Frank of Massachusetts, and wariness from the Senate Banking Committee, where Chairman Tim Johnson, D-S.D., has kept the SRO issue at arm's length.
Mr. Bachus made his proposal in response to an SEC study in January which said that the agency lacked the resources to examine advisers adequately and recommended an SRO as one option for Congress to consider. The SEC reviewed 8% of registered advisers in fiscal year 2011.
Mr. Emerson said that his boss is weighing the feedback and likely will modify the draft legislation before turning it into a formal bill.
“There will be differences based on responses we have had to the discussion draft,” Mr. Emerson wrote. “We are still in the process of gathering those responses.”
mschoeff@investmentnews.com
