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House Plans Hearing on SRO for Advisors for Sept. 13

House Plans Hearing on SRO for Advisors for Sept. 13

Another round in the highly politicized battle over who will oversee investment advisers is brewing. The House of Representatives plans to hold a hearing on Sept. 13 on provisions of Dodd-Frank that govern the regulation of broker/dealers and investment advisers. New legislation could follow.

The hearing will be held by the Financial Services Committee’s capital markets subcommittee, which is expected to review who should be responsible for enhanced examination of investment advisers--the SEC or an SRO (self-regulatory organization) like FINRA. Today investment advisers are examined by the SEC once every nine years, whereas broker/dealers are examined by FINRA once every three years.

FINRA has been vocal about wanting to assume the role of SRO for investment advisers. The investment adviser industry, however, worries FINRA has a broker/dealer bias and has called for the SEC continue to do the job. Currently, the SEC does not have enough funding.

In order for the SEC to transfer its examination power to one or more SROs, securities laws would need to be amended. Following the hearing, it is pretty likely that Congressmen Spencer Bacchus (R.-Ala.) or Scott Garrett (R.-N.J.) will introduce a bill to make such an amendment, said Duane Thompson, president of consulting firm Potomac Strategies and policy analyst for Fi360, a fiduciary training firm. But getting that legislation through the Democrat-controlled Senate would be another matter.

"Is Congress actually going to act within the next year and a half? That’s where I’m a little more out on a limb than your other pundits who just say it’s going to be a FINRA onslaught and they're going to oversee all investment advisers," said Thompson. "I just don’t think it’s that easy or simple."

At the September hearing, the subcommittee may also review whether a fiduciary standard should be extended to broker/dealers when they provide personalized investment advice.


What does the SEC want? Under a Dodd-Frank mandated study released in January, the SEC recommended a number of options for enhancing the examination of investment advisers: The SEC report suggested that the best of these would be for it to continue to do the job, charging user fees to fund a more thorough rotation of examinations. But it also set out that or one or more SROs could take on the responsibility.

Some suspect that FINRA is behind the Sept. 13 hearing. FINRA hired Michael Oxley in March, a former Congressman from Ohio, who co-authored the Sarbanes-Oxley Act and has good connections on the Financial Services Committee.

In the meantime, a separate SRO, called SROIIA, set up shop in March so that it could act as an SRO for investment advisers if given the option. SROIIA has recently teamed up with Fi360 to create a fiduciary examination for registrants.

“In the absence of SEC happening we think there should be an alternative to FINRA, and I think SROIIA is right in saying we need to be prepared for that possibility,” said Blaine Aikin, President and CEO of Fi360, which provides fiduciary training and consulting. “Material on the fiduciary standard in the series 65 examination is pretty limited,” he said. There is no timeline set yet for when Fi360 will roll out the examination, but the September hearing in the House adds some urgency to the issue, he added.

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Fiduciary Standard?

The House Financial Services Committee could not immediately comment about whether it will also consider the fiduciary standard in the Sept. 13 hearing.

The SEC has said it will begin rulemaking on the fiduciary standard in the fourth quarter of this year, but some Republicans have been pushing back. Financial Services Committee Chairman Spencer Bachus (R, Ala.) sent SEC Chairman Mary Schapiro a letter in early August urging the regulator to hold off until it had a better cost-benefit analysis.

The broker/dealer and insurance industries have argued that the fiduciary standard limits choice for consumers and raises the cost of advice. This has been difficult to prove, either way, however.

“Nothing I have seen has actually demonstrated convincingly that there is a cost handicap or limitation on choice [with the fiduciary standard]. It will be very hard for the industry to prove,” said Aikin. “Conflicted advice should be worth less, that’s clear, but there’s no evidence that it actually is,” he said.

Meanwhile, SIFMA has called for a fiduciary standard that would be governed by client contracts.

As it currently stands under Dodd Frank, if a fiduciary standard is extended to broker/dealer firms, an advisor or firm would have to disclose to a client that it had a conflict of interest when recommending things like IPOs underwritten by the firm or municipal bonds that are in the firm’s inventory or structured products that were packaged in house.

Financial advisors and firms would also have to disclose conflicts of interest if and when they sell commission-based products, where they are paid by the company manufacturing the product instead of by the client. Because the client only pays a one-time trade commission for this kind of service, as opposed to an ongoing annual fee on assets for advice as with an investment adviser account, opponents of the fiduciary standard say the commission-based approach is cheaper. Then again, commission-based accounts would not go away under the fiduciary standard as it is written into Dodd-Frank. The conflicts of interest they carry would simply have to be disclosed.

Preparing these additional disclosures might add expense for the firm, which they could then pass on to clients. The disclosures might also make the products less appealing to consumers, which, in a sense limits their choice. And then there are those who say disclosure simply doesn’t work.

New Fiduciary Advocacy Group

Whether rulemaking on the fiduciary standard happens soon or not, a new group has recently been created to promote the fiduciary standard over the long haul. Called The Institute for the Fiduciary Standard, it is a spinoff from the Committee for the Fiduciary Standard and it was put together by Knut Rostad and six other former members of the Committee. While the Committee will continue to focus almost exclusively on Dodd-Frank advocacy, the new Institute is meant to promote the standard long after Dodd-Frank has been implemented.

“In the immediate term we will continue to focus on the rulemaking at the DOL and SEC and in that light we are having a Sept. 9 event,” said Knut Rostad. Mid-term and longer term, he said, there will be a greater focus on educating investors about the sharp differences between the suitability and fiduciary standards and why that should matter to them, he continued.

In addition to Mr. Rostad, compliance and regulatory officer at Rembert Pendleton Jackson, the founders of the Institute for the Fiduciary Standard are Marion Asnes and James Patrick of Envestnet Inc.; Philip Chao of Chao & Co.; Maria Elena Lagomasino, chief executive of GenSpring Family Offices LLC; Michael Zeuner, also of GenSpring Family Offices; and Kathleen McBride of the Institute for Private Investors.

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