(CN) - The Investment Adviser Oversight Act has received mixed reviews from independent financial regulators who raised questions about the expanding regulatory role of the federal government.
Financial Services Committee Chairman Spencer Bachus (R-AL) and Rep. Carolyn McCarthy (D-NY) introduced the Investment Adviser Oversight Act of 2012 aimed at providing greater oversight of the investment advisory industry.
The bill was introduced partly in response to a SEC report that found the agency lacked the resources to oversee the nation's 12,000 registered advisers. The agency recommended that Congress establish one or more self-regulatory organizations (SRO) for advisers supported by membership dues.
In a press release , Chairman Bachus said, "The average SEC-registered investment adviser can expect to be examined less than once every 11 years. That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable. Bad actors will naturally flow to the place where they are least likely to be examined. Therefore, it is essential that we augment and supplement the SEC's oversight to dramatically increase the examination rate for investment advisers with retail customers."
The Financial Industry Regulatory Authority may be a model for the type of self-regulatory agency envisioned by the Bachus-McCarthy bill, and the authority announced its support for the bill in a press release.
"The bipartisan bill, Investment Adviser Oversight Act of 2012, introduced today is an important and thoughtful effort to address a serious gap in investor protection. The bill recognizes the need for regular exams of investment advisers, while rightly focusing on retail accounts. As FINRA has said, the current level of IA exams is unacceptable, and SROs can help fill this untenable gap in the protection of investment advisory clients."
In testimony before Congress, FINRA CEO Rick Ketchum said, "If FINRA becomes an SRO for investment advisers, we would implement regulatory oversight that is tailored to the particular characteristics of the investment adviser business."
However, the North American Securities Administrators Association (NASAA) responded critically to the new bill.
"The regulation of investment advisers long has been the shared responsibility of state and federal securities regulators. Chairman Bachus believes a self-regulatory organization for investment advisers is necessary because the federal government has not provided proper oversight over larger advisers, but his bill also would require state-registered advisers to become members of his new SRO. The creation of an SRO for state-regulated investment advisers is a misguided solution to a problem that does not exist," Jack Herstein, president of the NASAA, said in a statement .
In an interview with Courthouse News, Bob Webster, a spokesman for NASAA said, "The bill requires all state and federally regulated investment advisors to become a member of an SRO. We agree that there are concerns with the examination cycle of federal registered agents, however we see no need for state regulated investment advisers to join an SRO."
The states regulate investment advisors that manage $100 million or less, whereas the SEC manages larger advisers. The Bachus -McCarthy bill provides an examination exemption for these small to mid-size advisers, but would still require them to join an SRO and pay membership dues.
"Most of these firms are small, local businesses," Webster said. "We look forward to working with Congress to arrive at a legislative solution that benefits investors without exposing small investment advisers to redundant regulation and imposing job-killing costs on these small businesses to support a new and unnecessary regulatory regime."