Skip navigation

House Passes Regulatory Reform, SRO Up In The Air

The House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009 by a narrow margin Friday afternoon: 223 votes in favor to 202 against. But it will still be a long time before the regulatory future for broker/dealers and investment advisers is clear.

The House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009 by a narrow margin Friday afternoon: 223 votes in favor to 202 against. But it will still be a long time before the regulatory future for broker/dealers and investment advisers is clear.

“I think that all of us assumed that the Democrats would find the votes to pass the bill, but still that’s pretty close,” says David Tittsworth, executive director of the Investment Adviser Association. “It’s a big step. But you’ve got a long ways to go before you’ve got anything signed into law. Now the spotlight shifts to the Senate Banking Committee.” Christopher Dodd (D—Conn.), who heads the Senate Banking Committee, put out a draft bill in November. “We’re looking at going well into 2010, before you know what’s going to happen.”

Among other things, the House reform bill sets out to harmonize regulation of broker/dealers and investment advisers and to create a uniform fiduciary duty for all who offer personalized investment advice to retail investors. “The House bill has resulted in a pretty convoluted set of previsions dealing with fiduciary duty,” says Tittsworth. “They’re still able to wear two hats.” In other words, a financial advisor will only be held to a fiduciary standard while he is providing actual advice. Unless an advisor and client establish that they have an ongoing advisory relationship at the start, the advisor can switch to a suitability standard when selling individual investment products.

Still, under the House bill, the SEC will have final say over how many of the bill's provisions are interpeted, says Tittsworth.

SRO versus SEC

Who will regulate investment advisers is still very much up in the air, after the House of Representatives voted earlier today to strike an amendment from the legislation that would have given FINRA (the Financial Industry Regulatory Authority) jurisdiction over dually registered investment adviser firms. Dually registered firms represent about a quarter of all investment adviser firms, and 80 percent of investment adviser assets, according to the IAA. The amendment was sponsored by Senator Spencer Bachus (R-Al.).

"The likely legacy of the defeat of the Bachus Amendment will be to weaken the support on Capitol Hill for similar FINRA efforts," says regulatory attorney Bill Singer, a columnist for this magazine. "While FINRA has assembled a rumored $1 million war chest to lobby Congress for its various pet projects, the Bachus defeat was quite a black eye for Spencer Bachus and the attendant firestorm of criticism his amendment garnered from NASAA, public advocates, the Financial Planning Coalition, and others will likely serve to warn off many of his colleagues from proposing similar legislation."

Whether investment advisers should continue to fall under the jurisdiction of the SEC and the states, or an industry-run self-regulatory group, has become the subject of heated debate. Those who argue for the latter say it would be better funded and do a better job of limiting unintended consequences of rule-making.

Under an amendment created by Carolyn McCarthy (D-N.Y.), the SEC will be required to conduct a six month study on the merits of creating an SRO for the RIA/financial planning sector. Some of FINRA's lobbying dollars will no doubt be used to convince the SEC that it is the one for the job, says Singer. "Similarly, the Financial Planning Coalition is likely emboldened by the stunning reversal of the Bachus Amendment and will probably use its muscle and dollars to advance whatever SRO it deems is in its best interest. We should expect significant pressure from both sides."

The House bill also includes a provision that would shift greater regulatory responsibility for investment advisers onto the states, by raising the asset minimum for those RIAs falling under the SEC's jurisdiction to $100 million from $25 million. This would give the states jurisdiction over an additional 4,000 firms.

“Then the SEC can focus on the biggest investment adviser firms, especially the large money managers that need a lot of attention and could cause a systemic problems,” says Denise Voigt Crawford, Texas Securities Commissioner and president of NASAA, the North American Securities Administrators Association Inc. “I think that’s a really good solution to the problem of too few resources. Right now, in Texas, we have an inspection cycle of between two and three years. And under this legislation we would have authority for 900 more firms. If we got no more money at all, I could still go out and examine those firms much more frequently than the SEC does. It would be more like four to five years.” Today, most RIA firms get audited by the SEC once every ten years.

Still, some groups say self-regulatory organizations are inherently better at creating rules and keeping firms in line. “We think it’s more important to see Congress authorize and the SEC authorize creation of an industry regulator that’s funded by the industry and has the kind of opportunity for industry involvement that an SRO would provide,” says Dale Brown, president and CEO of the Financial Services Institute, a broker/dealer trade group. “It may be appropriate for FINRA to have that role.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.