Business Compliance Partners Provides an Update on the SRO Bill

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Jack E. Herstein, President of the North American Securities Administrators Association (NASAA) and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities issued a statement on behalf of NASAA about the “Investment Adviser Oversight Act”, which was introduced by House Financial Services Committee Chairman Spencer Bachus (R-Ala.) and cosponsored by Rep. Carolyn McCarthy (D-N.Y.).

Herstein said, “The regulation of investment advisers long has been the shared responsibility of state and federal securities regulators. Chairman Bachus believes a self-regulatory organization for investment advisers is necessary because the federal government has not provided proper oversight over larger advisers, but his bill also would require state-registered advisers to become members of his new SRO. The creation of an SRO for state-regulated investment advisers is a misguided solution to a problem that does not exist.”

The Investment Adviser Oversight Act (dubbed the SRO bill) would require that every investment adviser become a member of an SRO which would be overseen by the Securities and Exchange Commission (SEC). Typically investment advisers that manage less than $90 million are regulated by the states with those that manage $90 million or more regulated by the SEC.

The NASAA voiced concern that the SRO bill would infringe on state’s rights. “There has never been any evidence to suggest that states have failed in their mission of regulating smaller investment advisers. Nonetheless, this bill dictates how each state should regulate smaller advisers and requires state-regulated advisers to join a national SRO. The Bachus bill is an astonishing attack on our system of federalism with no demonstrated justification,” said Herstein.

Any SRO would have to demonstrate that it has the capacity to ensure compliance with federal and state securities laws as well as any rules and regulations that are established by the SRO.    An SRO would also have to be capable of performing periodic examinations if the state where an investment adviser maintains its principal place of business doesn’t conduct an examination at least every four years.

In addition, an SRO would be required to establish a membership process along with membership rules and regulations, institute a registration process for persons associated with members, create supervisory systems, and put disciplinary processes in place.

The SRO bill also addressed the composition of the Board of Directors of any SRO, membership dues and minimum interactions with federal and state regulatory authorities.

Recently the House Financial Services Committee held a hearing on the SRO bill. During the hearing the SEC’s examination of less than 10% of the firms they regulate each year, and the Ponzi schemes that have come to light in recent years were cited as reasons for the SRO bill.

Opponents of the SRO bill cited the costs of setting up and operating an SRO (which would be passed on to its members), the negative impact of adding an additional layer of regulation on jobs, and the steep learning curve for the Financial Industry Regulatory Authority Inc. (if chosen to be the SRO that supervises investment advisers), because of lack of experience in promoting and enforcing the fiduciary standard.

The backlash prompted Rep. Maxine Waters (D-CA), to suggest that she would draft legislation to create a user fee program to fund an increase in the number of examinations the SEC can conduct each year.

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