In a congressional hearing last week, witnesses and lawmakers expressed concern about how much it would cost to set up and operate an SRO.
Investment advisers remain opposed to legislation that would put them under the jurisdiction of a self-regulatory organization even after a suggestion by the bill's author that the SRO membership fees could be capped.
In a congressional hearing last week, witnesses and lawmakers expressed concern about how much it would cost to set up and operate an SRO.
The author of the bill, House Financial Services Committee Chairman Spencer Bachus, R-Ala., responded by saying that he would consider amending it so that small advisers paid just a “de minimus” membership fee to the SRO, which could turn out to be the Financial Industry Regulatory Authority Inc., the regulator for brokers.
“Republicans and Democrats are sensitive to the costs,” said Mr. Bachus, whose bill would authorize one or more SROs to conduct examinations of investment advisers with retail clients. “We don't want to unnecessarily burden investment advisers, but at the same time, they need to be examined.”
The prospect of a discount for small advisers doesn't comfort Jonathan Roberts, senior vice president and chief compliance officer at Klingenstein Fields & Co. LLC.
Perhaps small firms would have their fees capped, but a firm like his, with $4 billion in assets under management, still would have to pay up.
“It's a political move that I find very cynical — to try to carve out a piece of opposition to the bill,” Mr. Roberts said.
“You still have to create the same structure,” he said. “It's still going to cost the same thing; that has to be allocated somehow.”
Mr. Roberts shared his views with lawmakers last Thursday as part of the Investment Adviser Association's “lobbying day.” The organization sent about 50 advisers to Capitol Hill to press the case that an SRO would be a costly new layer of regulation and would threaten jobs.
LIMITED RESOURCES
When he introduced the bill in April, Mr. Bachus compared favorably Finra's 58% annual examination rate of broker-dealers to the Securities and Exchange Commission's acknowledged 8% rate for advisers, which the commission asserts is all it can do with its limited resources.
The measure responds to a 2011 SEC study that outlined three ways to increase adviser examinations: allow the SEC to charge a user fee for exams, establish an SRO or extend Finra's reach to include advisers dually registered as brokers. Each option would require congressional approval.
According to Mr. Bachus, the measure he introduced with Rep. Carolyn McCarthy, D-N.Y., is necessary to prevent investor ripoffs such as the multibillion-dollar Ponzi schemes orchestrated by Bernard Madoff and Allen Stanford.
“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,” Mr. Bachus said.
With all the questions raised at the hearing, including concerns about the broad array of advisers that the bill would exempt from the SRO, and state regulators' qualms that an SRO undermines their authority, it appears unlikely that the bill will receive a committee vote this month, pushing it farther out on the House legislative calendar as the session winds down.
There is little prospect for Senate action, meaning the measure likely will have to be reintroduced next year. But anything the House accomplishes this year will set an important precedent for the bill.
As the legislation moves along, financial advisers are watching warily as Finra assumes the pole position to become the adviser SRO.
"FOREGONE CONCLUSION'
“If an SRO for advisors gains approval, it's a foregone conclusion that it will be Finra that regulates the industry,” Brian Hamburger, managing director of advisory consultant MarketCounsel, said last week at the Pershing Insite conference in Hollywood, Fla.
That prospect doesn't sit well with many advisers, who argue that Finra lacks experience with the fiduciary standard of care that they must meet. Brokers adhere to a less stringent suitability standard.
Some advisers also worry that Finra would foist its rules-based regulation model on advisers.
“They're coming from an entirely different culture,” said Dave O'Brien, president of O'Brien Financial Planning Inc. “It would be like pharmaceutical companies regulating doctors.”
Craig Hester, chief executive of Hester Capital Management LLC, said that his $1.1 billion, 14-employee firm spends about 4% of its budget on compliance.
“If we wake up tomorrow with Finra as the SRO, we would expect those costs to double,” he said.
In an appearance before the House committee last week, Finra chief executive Richard G. Ketchum said that 1,700 of the 4,002 Finra-registered brokers paid less than $1,000 in fees last year.
He also said that Finra would create a separate governance structure for advisers that fit the characteristics of the sector.
Not all advisers oppose Finra.
“It would be better to have one regulator, and I'd prefer it to be Finra for some consistency,” said Keith Gillies, a managing partner at River Parishes Advisors Group LLC and a director of the National Association of Insurance and Financial Advisors.
He said that his dually registered firm spends a “few hundred hours” and about $7,000 to $10,000 a year on compliance.
“The paperwork is overwhelming, and it's getting more complicated, not easier,” Mr. Gillies said.
If regulation is not consolidated with Finra, “we would have to increase our fees to the point where we would price out the middle market [of investors],” he said.
Many advisers are pushing the SEC user fee option.
Rep. Maxine Waters, D-Calif., said that she soon will introduce legislation to authorize this approach.
But the prospects of Congress' increasing the SEC budget are dim. Last week, a House Appropriations subcommittee approved a bill that gave the SEC only $50 million of the $245 million budget increase it requested for fiscal year 2013.
“Would I prefer if we went through the SEC? Absolutely. Are we going to get the money to do it? No, we're not,” Ms. McCarthy said at the hearing.
Dan Jamieson contributed to this story.
mschoeff@investmentnews.com
