House Hearing on Investment Adviser Oversight Act

On Wednesday, the House Financial Services Committee held a hearing on the Investment Adviser Oversight Act. This bill would create a new self-regulatory organization for investment advisers.

Chairman Bachus opened up by offering to revise the list of exemptions. This worries me, since private funds are currently exempted.

My Congressman, Barney Frank, the ranking minority member of the Committee, pointed out that it is important not to leave state regulators out of the oversight mix. He pointed out that the entire budget of the SEC and CFTC  combined is less than J.P. Morgan’s derivative trading loss last month. The inadequate funding of the SEC is why the Committee is even considering a Self Regulatory Organization.

Congressman Barrett pulled out the Madoff failure as a complete indictment of the SEC. FINRA examined the broker-dealer side of Madoff several times and did a much more thorough job. (I will guess than “Madoff” will be mentioned many times today.)

Congressman Lynch raised concerns about the cost of an SRO on small advisers and the need to keep state regulators involved.

Congressman Scott thinks there is a big gap in investor protection because the SEC reviewed only 8% of the 12,000 registered advisers and compared this to FINRA’s 58% inspection rate in 2011.

Congressman McCarthy mentioned Madoff. She prefers the SEC but realizes the reality that Congress will not fully fund the SEC.

Current text of H.R. 4624, the “‘Investment Adviser Oversight Act of 2012”


  • Mr. Dale Brown, President and Chief Executive Officer, Financial Services Institute
  • Mr. Thomas D. Currey, Past President, National Association of Insurance and Financial Advisors
  • Mr. Chet Helck, Chief Operating Officer, Raymond James Financial Inc., on behalf of the Securities Industry and Financial Markets Association
  • Mr. Richard Ketchum, Chairman and Chief Executive Officer, Financial Industry Regulatory Authority
  • Mr. John Morgan, Securities Commissioner of Texas, on behalf of the North American Securities Administrators Association
  • Mr. David Tittsworth, Executive Director and Executive Vice President, Investment Adviser Association

Mr. Brown supports the bill. “Consumers should not have to be regulatory experts to determine if they are being protected.” He cites data that 40% of investment advisers have never been examined. He endorses FINRA because they have the existing infrastructure.

Mr. Currey supports the bill and cites the same data as Mr. Brown.

Mr. Helck also supports the bill.

Mr. Ketchum supports the bill. (No surprise, since he is apparently hoping to expand the reach of FINRA.)

Mr. Morgan highlights the breadth and scope of oversight in Texas. He also pointed out the smaller income and scale of many advisers. He is concerned about the time and money a new SRO would impose on state registered advisers.

Mr. Titsworth is opposed and cites a long list of other organizations that are opposed to the SRO model and are critical of FINRA.  The cost of an SRO will greatly exceed the cost of just funding the SEC.

Chairman Bachus attacked the Boston Consulting group report on regulatory costs.

Mr. Morgan highlights some of the Constitutional concerns with requiring state regulators to report to an SRO.

The hearing turned into an attack on SROs and FINRA in particular. SROS are not required to submit to the cost-benefit analysis and FOIA requirements that an governmental regulator is subject to.

A Congressman asked why we think that creating another regulator will fix the problem. The Madoff failure was a regulator failure. (The SEC is hampered by a lack of funding.)

From the perspective of small advisers, the bill would subject state registered advisers to state regulatory oversight and SRO oversight.

Another pitch for FINRA came from the area of dual-registrants. They are already subject to FINRA on the broker-dealer side. By putting one organization in place as a regulator, you potentially fill a gap.

The panel’s score was 4 in favor, 2 against. Certainly, there is more to come.

Washington DC – Capitol Hill: United States Capitol  by Wally Gobetz

, ,


  1. Pay to Play and Cash Solicitations – Compliance Building - June 14, 2012

    […] Part of the rule was reliant on FINRA coming up with a rule to meet the requirements under the definition of “registered person” in 206(4)-5(f)(9)(ii)(B) for broker-dealers. FINRA has not done that yet. (Isn’t FINRA supposed to be more effective than the SEC?) […]