The new, bipartisan Investment Adviser Oversight Act of 2012 was described as having been conceived in response to a 2011 Securities & Exchange Commission study, which revealed that the SEC lacked the resources to adequately examine America’s nearly 12,000 registered financial advisers.
The study had been conducted as a requirement of the Dodd-Frank Act, a sprawling, post-financial crisis financial reform package that has defied implementation because of its complexity. In response to the study’s findings, the SEC “recommended a self-regulatory organisation (SRO) as one option for Congress to consider as it looks for ways to help the agency monitor the industry,” according to a statement posted on the House of Representatives’ website on Wednesday, announcing the new bill.
Unlike the UK’s Retail Distribution Review, which was a comprehensive regulatory overhaul that among other things aims to boost standards by increasing advisers’ education and banning commissions, and requiring advisers instead to bill their clients for their advice, the proposed US legislation would do little more than provide for the authorisation of one or more SROs to be designated to oversee the US financial advisory industry. US advisers would have to be registered with an SRO if they wished to deal with retail clients, and financing for the scheme would come from fees paid by industry members.
Currently in the US, investment advisers and broker-dealers “often provide indistinguishable services to retail customers, yet only 8% of investment advisers were examined by the SEC in 2011 compared to 58% of broker-dealers,” the statement noted.
Uncertain reception
It was not immediately clear when Congress would be asked to vote on the proposed legislation, or when, at its earliest, it might be enacted, assuming it were to be voted into law.
It could potentially face an uphill battle in Congress, which has seen a backlash to some of its existing and recently proposed regulation, including the Foreign Account Tax Compliance Act. FATCA forces significant new financial reporting obligations onto non-US banks and financial services institutions, and has created headaches for foreign companies that have American clients, American expatriates, and foreign investors in American entities, such as companies and stocks.
With a presidential election looming on 6 Nov, some Republican candidates are campaigning on a promise of dismantling regulations rather than adding to them, as part of their “anti-big-government” approach.
At the same time, though, particularly in the wake of the recent global financial crisis, there is a growing sense in the US as elsewhere that many retail investors may not fully understand the financial products they are being sold.
The US National Association of Insurance and Financial Advisors, for example, recently decided, according to a statement on its website, to encourage its 45,000 members to disclose their commissions, after it participated in hearings on the subject and “it became clear that NAIFA did not have a positive response to the question, ‘What if the customer wants to know how much you (producer/adviser) make on a sale?’ ”
Since a new law took effect last year, meanwhile, insurance brokers and agents in New York State have had to tell their clients, in writing, how they are being compensated.
‘Unacceptable lack of oversight’
The Investment Adviser Oversight Act of 2012 was introduced to Washington lawmakers on Wednesday by the House Financial Services Committee, whose chairman, Republican Rep Spencer Bachus of Alabama, is one of its two sponsors. (The other is a New York State Democrat, Rep Carolyn McCarthy.)
In a statement, Rep Bachus noted that the average SEC-registered investment adviser “can expect to be examined less than once every 11 years” which he said was “unacceptable…particularly in the aftermath of the Madoff scandal”.
“Bad actors will naturally flow to the place where they are least likely to be examined,” he added.
“Therefore, it is essential that we augment and supplement the SEC’s oversight to dramatically increase the examination rate for investment advisers with retail customers.
“Customers may not understand the different titles that investment professionals use, but they do believe that ‘someone’ is looking out for them and their investments.
“For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change.”
‘National Investment Adviser Associations’
As outlined by reps Bachus and McCarthy, the proposed legislation would amend an existing law, known as the Investment Advisers Act of 1940, to provide for the creation of new so-called “National Investment Adviser Associations” (NIAAs), which would be registered with and overseen by the SEC.
US investment advisers would be expected to become members of one of these organisations, which would be overseen in turn by the SEC.
Nod to state power
The proposal acknowledges a right given by a section of the Dodd-Frank Act to the 50 US states to oversee small investment advisers (less than $100m in assets under management) within their borders, so long as the states conduct periodic on-site examinations of these firms.
Among the already-existing SROs thought likely to be given a key role in overseeing US financial advisers if the legislation is enacted is the Washington DC-based Financial Industry Regulatory Authority (FINRA).
Ina statement on its website on Wednesday, the organisation described the proposed legislation as “an important and thoughtful effort to address a serious gap in investor protection”.
FINRA said that the current standard for educating investment advisers in the US currently was “unacceptable” and that self-regulatory organisations like FINRA “can help fill this untenable gap in the protection of investment advisory clients”.
The New York Times, meanwhile, noted that the non-profit FINRA is the only SRO that “has emerged as a likely candidate” for the role of monitoring America’s advisory industry, as envisioned by reps Bachus and McCarthy.
FINRA already examines some 4,500 brokerage firms, and according to the NYT, said it would cost “up to $15m to create an investment advisory oversight plan, and about $150m to maintain it every year”.
To view a copy of the bill, click here.
To read about Singapore’s recent introduction of a review of its financial services advice industry ahead of introducing new regulations aimed at raising standards, click here.
