Reuters: Regulatory News: US proposal on investment adviser oversight slammed

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US proposal on investment adviser oversight slammed May 31st 2012, 21:54 Thu May 31, 2012 5:54pm EDT * Massachusetts official criticizes proposal on self-regulation * Massachusetts survey adds to heated debate on proposal * Hearing for federal adviser oversight bill set for June 6 By Suzanne Barlyn May 31 (Reuters) - Federal legislation that would require self regulation for registered investment advisers would be financially burdensome and not guarantee more investor protection, the top securities regulator in Massachusetts said on Thursday. Nearly 70 percent of state-registered investment advisers surveyed in Massachusetts said they would suffer a "severe" financial impact if legislation proposed in the U.S. House of Representative that would create a self-policing body to oversee them and thousands more in the United States becomes law, according to a report released Thursday by Massachusetts Secretary of Commonwealth William Galvin. More than half of the 353 advisers who responded to the survey said they may have to lay off staff if burdened with paying fees for a self regulatory group. Unlike broker-dealers, who are overseen by the Financial Industry Regulatory Authority (FINRA), investment advisers have no self-policing group and are typically are examined by the U.S. Securities and Exchange Commission or state regulators, typically less frequently. Still, a self-regulatory organization for advisers is "not effective regulation" and would be "the worst of both worlds," Galvin said in an interview on Thursday. What's more, "it's burdensome on those who would be regulated." Galvin's remarks and the Massachusetts survey results come ahead of a hearing by the House Financial Services Committee set for next Wednesday about the self-regulatory organization proposal. House Financial Services Chairman Spencer Bachus, a Republican, and Democrat Carolyn McCarthy introduced the bill in April, saying that the SEC lacks the resources to effectively supervise investment advisers. The bill could, among other things, weaken a provision of the Dodd-Frank financial reform law requiring advisers who manage between $25 million and $100 million in assets to switch from oversight by the SEC to oversight by state regulators. Galvin joins a host of other organizations stepping up either their support or opposition to the bill. Many advisers are also concerned that FINRA, which has been promoting itself as a potential regulators for investment advisers, could be tapped to serve in that role. Advisers face steep opposition from the brokerage industry, which has been calling for more oversight of registered investment advisers, especially as regulators consider higher standards of responsibility for brokers who give personalized investment advice. Registered investment advisers are already subject to those standards, which require acting in a client's best interests, but a gap in oversight between the two industries also has to be reconciled to protect investors, the industry says. A study by SEC staff revealed in 2011 that the agency examines the nation's roughly 11,000 investment advisers about every 10 years. FINRA visits the almost 4,600 broker-dealers under its jurisdiction an average of once every two years. Protecting investors will require better policing of investment advisers, wrote Joseph Russo, chairman of the Financial Services Institute, a trade group for independent broker dealers, in a letter to its members on Tuesday. "To protect consumers and level the playing field, this regulatory gap must be eliminated," he wrote. Opponents of the investment adviser oversight bill include Schwab Advisor Services, a unit of Charles Schwab & Co. Inc., which is the custodian of client funds for more than 7,000 registered advisers. In an e-mail to those advisers on Wednesday, Bernie Clark, executive vice president of Schwab Advisor Services, warned that the outcome in the debate over the best type of oversight "could have a substantial impact on (their) business." Clark will join representatives from the Investment Adviser Association, a trade group, next Thursday to lobby lawmakers on the issue. A letter to lawmakers on Tuesday from the Project on Government Oversight, a Washington-based watchdog group, also voiced concerns about the possibility of FINRA becoming a regulator for advisers. FINRA's practice of collecting fees from member firms and investing in the same industry it regulates, raises "questions about an inherent conflict of mission," wrote Angela Canterbury, the group's public policy director and Michael Smallberg, an investigator. FINRA however, points to the SEC study released last year, in which the agency's staff concluded that it was unable to adequately oversee and examine investment advisers. The SEC, a FINRA spokeswoman said in a statement, found that the use of self-regulatory organizations "overseen by the SEC is a proven way to augment government resources and to provide the needed oversight." Link this Share this Digg this Email Reprints

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