Reuters: Regulatory News: UPDATE 1-US groups tussle over investment adviser oversight

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UPDATE 1-US groups tussle over investment adviser oversight Jun 6th 2012, 17:53 Wed Jun 6, 2012 1:53pm EDT * Lawmakers hear opposing views on adviser oversight bill * Bill supporters outnumber opponents in testimony * Hearing adds to ongoing controversy over bill By Suzanne Barlyn June 6 (Reuters) - Two sides in an industry divided over how to oversee investment advisers faced off on Wednesday before U.S. lawmakers considering a bill that would ramp up protections for investors. The measure, the Investment Adviser Oversight Act of 2012, would require a self-regulatory organization for registered investment advisers. Financial Services Committee Chairman Spencer Bachus, a Republican, and Rep. Carolyn McCarthy, a Democrat, unveiled the bill in April because the two lawmakers believe the U.S. Securities and Exchange Commission, which supervises investment advisers, lacks the resources to be effective. The issue has long been debated, but gained traction following the U.S. financial crisis of 2008 and the revelation that same year of Bernard Madoff's multibillion-dollar Ponzi scheme. The massive fraud occurred in Madoff's investment advisory operation, and the SEC failed to detect the fraud despite numerous opportunities. Both sides in the current debate agree that registered investment advisers are not regularly examined. What they disagree on is how to facilitate more frequent exams and who should be conducting them. One industry group, the Investment Adviser Association, supports a "user fee" system in which advisers would pay fees to the SEC to cover their examination costs. There are nearly 12,000 registered investment advisers in the United States under SEC oversight, according to the committee. Only 8 percent of those RIAs were examined by the SEC in 2011, compared with 58 percent of broker-dealers examined by the Financial Industry Regulatory Authority and other regulators during that time, according to a news release from the House Financial Services Committee. Unlike broker-dealers, investment advisers have no self-policing group and are typically examined by the SEC or states. In Wednesday's congressional testimony, proponents of the bill outnumbered those who are opposed. The composition of the witness list added to the heated debate that has surrounded the proposed measure. "It's curious the committee has chosen to devote the bulk of their witness slots to broker-dealer representatives," said Barbara Roper, director of investor protection for the Consumer Federation of America, an advocacy group that was not asked to testify. Leaders from two groups testified about their concerns regarding the bill. Among their worries: RIAs would not be overseen directly by the SEC, and that a self-regulator would present built-in conflicts of interest because it would be funded by the industry it regulates. Other witnesses who testified in favor of the bill came from three trade groups: the Securities Industry and Financial Markets Association, the Financial Services Institute, and the National Association of Insurance and Financial Advisors. The head of Wall Street's industry-funded regulator, FINRA, also testified. While the four groups voiced support for a new self-regulatory organization, the Investment Adviser Association and the North American Securities Administrators Association (NASAA), an organization of state regulators, urged lawmakers to allow the SEC and states to remain in charge. "The SEC is best-positioned to provide effective oversight," said David Tittsworth, the Investment Adviser Association's executive director, in prepared remarks. He later reaffirmed that position in response to questioning by Rep. Maxine Waters, a Democrat from California, who said she is drafting legislation that would create a user fee program to beef up SEC funding. While the bill does not mention the name of a possible self-regulatory group for investment advisers, FINRA, which has been lobbying for the role, is prepared to tailor rules "to the particular characteristics of the investment adviser business," its head, Richard Ketchum, said in prepared testimony. Another theme of the debate: A difference in oversight that clouds other pending regulation. Brokerages say that a push by regulators to require them to act in their clients' best interests - a higher standard of responsibility that investment advisers already follow - would be unfair unless advisers were examined as often as brokers. "This gap in regulatory oversight simply must be addressed," Chet Helck, SIFMA's chairman-elect, said in prepared testimony. "Clients deserve the same level of regulatory protection regardless of the status of their intermediary," said Helck, who is also chief operating officer of Raymond James Financial Inc. In addition, state regulators are concerned that the legislation "has the very real potential of being a job-killing bill" for small and mid-sized advisers, said John Morgan, the securities commissioner of Texas, who testified in prepared remarks on behalf of NASAA. It "would create redundant and unnecessary layers of new regulation and cost," Morgan said. Link this Share this Digg this Email Reprints

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