Corporate & Securities Law

By Jim Hamilton

FINRA Investment Adviser Oversight Provision Stripped from House Reform Legislation

A floor amendment to the Wall Street Reform and Consumer Protection Act, HR 4173, offered by Rep. Cohen of Tennessee stripped a provision out of the legislation that would have authorized the SEC to delegate the regulation of investment advisers to FINRA. The provision had been inserted during the mark up of the bill by the Financial Services Committee. Offered during the mark up by Committee Ranking Member Spencer Bachus of Alabama, the amendment would have allowed the SEC to permit or require FINRA to enforce compliance by its members and associated persons with the provisions of the Act. The Bachus Amendment would have empowered FINRA to enforce the fiduciary duty provisions in the Investment Advisers Act against not only broker-dealer members but also against any affiliated investment advisory firm or any associated person. Additionally, the amendment would have given FINRA sweeping rulemaking authority. The provision would have extended FINRA?s jurisdiction to SEC registered investment advisers that manage almost 80 percent of all advisory firms? assets under management.

The House ultimately declined to outsource a core mission of the SEC to an SRO out of concern that the high level of investor protection provided under the Advisers Act fiduciary duty would be diminished if FINRA were to obtain the additional authority. The SEC must remain the proper, independent regulator of investment advisers since the Commission is in the best position to oversee investment advisers under the Investment Advisers Act.

SEC Commissioner Luis Aquilar had earlier rejected the main argument in favor of putting oversight in the hands of an industry self-regulator, which is that the SEC lacks resources. The issue of resources masks the real situation, he said, since no private organization has the existing resources to expand investment adviser oversight. No one can suggest that FINRA will oversee advisers using the current budget and staff it has in place. Instead, the investment advisers will need to be assessed a bill for this additional oversight. And if advisers have to write a check to someone, he noted, it makes much more sense for that check to go to the SEC since the SEC already has the team and expertise in place. This issue really boils down to whether Congress is going to enhance the SEC by expanding its authority and fortifying its resources, including user fees from advisers, or weaken the SEC, by taking away its direct oversight in order to transfer it to an industry organization.

Full post as published by Jim Hamilton's World of Securities Regulation on December 30, 2009 (boomark / email).