During our most recent webinar exploring regulatory reform, we received a question regarding whether investment advisors will still be supervised by the SEC or their respective state. In recent months, the Administration, Congress and regulators have been much more focused on other capital market issues as they consider financial regulatory reform, and the issue of oversight of investment advisors has gone largely unrecognized in Congressional hearings and proposed legislation.
However, recent media reports make it appear as though regulation and oversight of advisors is still a burning topic. Earlier this month, Texas securities regulator and NASAA President Denise Voigt Crawford stated she would like to see a greater role for the states in regulatory oversight of investment advisors and argued that the dividing line between SEC and state regulation should be raised from assets under management of $25 million (or less) to $100 million. This week, however, the SEC's head of Investment Management, Andrew Donohue stated that the issue of whether advisors should be supervised by a SRO must be resolved before states are given more authority over advisors.
But while oversight issues may be a hot topic among the industry and regulators, it is a lot less clear that it is an issue legislators are ready to address through legislation. In fact, it was reported earlier this week that while the House Financial Services Committee plans to discuss investment advisor issues at a hearing on October 6, Congress may end up punting the fiduciary issue that has been a part of the public discussion to this point.
While there continues to be much speculation about whether Congress will address fiduciary issues as well as oversight issues this fall through legislation, it is clear that the SEC is waiting for a signal from Congress on how to proceed. Moreover, the SEC's ability to act is limited without legislation, particularly in the area of investment adviser oversight.
It has been widely reported that the SEC lacks the resources to effectively oversee and examine the more than 11,000 investment advisors currently subject to its jurisdiction. SEC Chairman Schapiro and Commissioner Aguilar have both publicly supported self funding for the agency as a means for increasing its budget, and Senator Charles Schumer has backed the idea with proposed legislation.
Absent a legislative initiative to increase SEC resources, greater state involvement and/or SRO oversight of advisors could become the solution of choice to ensure more effective oversight of advisors. But again, both solutions require legislation either to change the dividing line that separates state and federal regulation, or to set laws requiring any SRO responsible for supervising advisors to register with and be subject to the oversight of the SEC.
Advisory trade groups and NASAA have argued against SRO oversight because they fear that FINRA will become the SRO of choice. However, whether FINRA becomes the SRO responsible for advisors, it still stands to play a major role in regulating fiduciaries depending on how the fiduciary standard is extended to brokers that provide investment advice to investors. All of these complicated issues likley will not be resolved anytime soon given the long list of issues Congress and the SEC are currently tackling. Thus, the status quo of advisor oversight will stay in place for now. However, given the growing list of frauds uncovered at the state and federal level this past year, advisors should not rule out a change in how they are regulated and the regulator to whom they answer, especially once Congress is finished tackling the larger reform issues early next year.
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UPDATE 10/5/09: On October 1, Congressman Paul Kanjorski released a discussion draft of the Investor Protection Act, which will be the subject of a House Financial Services Committee hearing on October 6. Included among the various provisions of the legislative draft is a proposal for an independent study of the operations and structure of the SEC and SROs. With regard to SROs, the draft bill specifically calls for the study of "the present self-regulatory organizational structure and a determination of whether the present reliance on self-regulatory organizations promotes efficient and effective governance for securities markets." In addition, the draft legislation proposes to give the SEC the authority to collect fees from registered investment advisors to cover the cost of inspections and examinations of those advisors. Given these proposals for a study and SEC funding, it is clear that Congress envisions the SEC and states maintaining their current roles overseeing advisors if this legislation is enacted and that an SRO for advisors would not become an option unless the independent study provided evidence that it could be an effective model.
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This question was asked during our most recent webinar exploring regulatory reform, "The converging worlds of brokers and advisors as fiduciaries under regulatory reform." To view a recording of this and previous webinars, as well as view the schedule of upcoming webinars, visit the webinars page of fi360.com.
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