(CN) - The House Financial Services Committee got a conflicting earful Wednesday from the Financial Industry Regulatory Authority and the North American Securities Administrators Association about the potential impacts of the proposed Investment Adviser Oversight Act, which would create a self-regulatory organization for investment advisers.
Introduced in April by Financial Services Committee Chairman Spencer Bachus (R-AL) and Rep. Carolyn McCarthy (D-NY), H.R. 4624 provides for the establishment of an investment adviser self-regulatory organization funded by membership dues.
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 SEC recommended that Congress establish one or more SROs for advisers, such as those that already exist for brokers.
Richard Ketchum, the CEO of the Financial Industry Regulatory Authority spoke to the Committee on Wednesday in support of the bill and discussed the potential for FINRA to expand its examination program to investment advisers.
"The SEC and state securities regulators play vital roles in overseeing both broker-dealers and investment advisers, and they should continue to do so. Investor protection demands, however, that more resources be dedicated to regular and vigorous examination and day-to-day oversight of investment advisers. While the regulatory status quo may be appealing to some in the investment advisery industry, the current level of adviser exams is unacceptable, and authorizing the SEC to designate one or more SROs to assist it with overseeing investment advisers is the most efficient solution to addressing this critical investor protection issue," Ketchum said.
He noted that givien FINRA's "experience operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem."
Ketchum repeated the organization's much-criticized estimate that its one-time cost to start up an investment adviser SRO would be $12-15 million and he had sharp words for the Boston Consulting Group's review of FINRA's cost analysis. "It is evident that their analysis was meant to be a political document rather than a serious attempt to explore costs," he said.
John Morgan, the Securities Commissioner of Texas, testified on behalf of the North American Securities Administrators Association and had a very different view of the new legislation.
"We are extremely concerned about the very real impact this legislation will have on state-registered investment advisers and the clients they serve. In short, the most urgent problem with this legislation is that it has the very real potential to be a job killer," he said.
The states regulate investment advisers that manage $100 million or less, whereas the SEC manages larger advisers.
"From a state regulatory perspective, H.R. 4624 is unnecessary in Texas as Texas-registered investment adviser firms are currently subject to strong state oversight and inspection. The same holds true for the overwhelming majority of states," Morgan added.
"As a matter of policy, investment adviser regulation is a governmental function that should not be delegated to an SRO," Morgan said.
"Above and beyond NASAA's concerns with the SRO model and its application to investment adviser regulation, state securities regulators are adamantly opposed to H.R. 4624 because we believe it would subordinate state regulators to an SRO, impose redundant regulation and new costs on small and mid-size investment advisers that are impossible to justify, and very likely put many of the small firms that we regulate out of business," he concluded.