    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                       H.R. 4624, THE INVESTMENT ADVISER

                             OVERSIGHT ACT OF 2012

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   ----------

                                  JUNE 6, 2012

                                   ----------

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-132

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                       SPENCER BACHUS, Alabama, Chairman

    JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts,
        Chairman                             Ranking Member
    PETER T. KING, New York              MAXINE WATERS, California
    EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
    FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
    RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
    DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
    WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
    JUDY BIGGERT, Illinois               BRAD SHERMAN, California
    GARY G. MILLER, California           GREGORY W. MEEKS, New York
    SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
    SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    JOHN CAMPBELL, California            JOE BACA, California
    MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
    THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
    KEVIN McCARTHY, California           DAVID SCOTT, Georgia
    STEVAN PEARCE, New Mexico            AL GREEN, Texas
    BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
    MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
        Pennsylvania                     KEITH ELLISON, Minnesota
    LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
    BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
    BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
    JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
    ROBERT HURT, Virginia
    ROBERT J. DOLD, Illinois
    DAVID SCHWEIKERT, Arizona
    MICHAEL G. GRIMM, New York
    FRANCISCO ``QUICO'' CANSECO, Texas
    STEVE STIVERS, Ohio
    STEPHEN LEE FINCHER, Tennessee

               James H. Clinger, Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        June 6, 2012.................................................     1
    Appendix:
        June 6, 2012.................................................    43

                                   WITNESSES
                            Wednesday, June 6, 2012

    Brown, Dale E., President and Chief Executive Officer, Financial
      Services Institute (FSI).......................................     8
    Currey, Thomas D., Past President, National Association of
      Insurance and Financial Advisors (NAIFA).......................    10
    Helck, Chet, Chief Executive Officer, Global Private Client
      Group, Raymond James Financial Inc.; and Chairman-Elect, the
      Securities Industry and Financial Markets Association (SIFMA)..    11
    Ketchum, Richard G., Chairman and Chief Executive Officer, the
      Financial Industry Regulatory Authority (FINRA)................    13
    Morgan, John, Securities Commissioner of Texas, on behalf of the
      North American Securities Administrators Association, Inc.
      (NASAA)........................................................    15
    Tittsworth, David G., Executive Director and Executive Vice
      President, the Investment Adviser Association (IAA)............    16

                                    APPENDIX

    Prepared statements:
        Brown, Dale E................................................    44
        Currey, Thomas D.............................................    73
        Helck, Chet..................................................    81
        Ketchum, Richard G...........................................    94
        Morgan, John.................................................   103
        Tittsworth, David G..........................................   115

                  Additional Material Submitted for the Record

    Bachus, Hon. Spencer:
        Written statement of the Investment Company Institute........   169
    Frank, Hon. Barney:
        Written statement of the Consumer Federation of America......   174
        Written statement of the Financial Planning Coalition........   177
        Letter from the Project on Government Oversight..............   240
    Frank, Hon. Barney; and Watt, Hon. Melvin:
        Letter from Ernest A. Young, Alston & Bird Professor of Law,
          Duke University School of Law..............................   249
    Meeks, Hon. Gregory:
        Brief Amici Curiae of the Cato Institute and the Competitive
          Enterprise Institute in Support of Petitioner..............   256
        Center for Capital Markets Competitiveness report entitled,
          ``U.S. Capital Markets Competitiveness: The Unfinished
          Agenda,'' dated Summer 2011................................   289

                       H.R. 4624, THE INVESTMENT ADVISER

                             OVERSIGHT ACT OF 2012

                                  ----------

                            Wednesday, June 6, 2012

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10 a.m., in room
    2128, Rayburn House Office Building, Hon. Spencer Bachus
    [chairman of the committee] presiding.
        Members present: Representatives Bachus, Hensarling,
    Manzullo, Biggert, Capito, Garrett, Neugebauer, McHenry,
    Campbell, Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga,
    Duffy, Hayworth, Renacci, Hurt, Schweikert, Canseco, Stivers,
    Fincher; Frank, Waters, Maloney, Watt, Meeks, Capuano,
    Hinojosa, McCarthy of New York, Lynch, Scott, Green, Ellison,
    Perlmutter, and Carney.
        Chairman Bachus. The committee will come to order. We are
    going to have opening statements for a total of 20 minutes, 10
    minutes on each side. I will begin with my opening statement.
        This morning, the committee will examine bipartisan
    legislation, the Investment Adviser Oversight Act that
    Congresswoman McCarthy and I have introduced to protect
    investors. In September, the Subcommittee on Capital Markets
    held a hearing on the draft version of this bill, and I thank
    both proponents and opponents of the legislation who offered
    constructive suggestions.
        While the average American investor may not understand the
    different titles that investment professionals use, they do
    believe there is a reasonable level of oversight designed to
    protect their investments from fraud. For broker-dealers, that
    reasonable level of oversight exists. Broker-dealers face
    routine examinations on a regular and consistent basis. But the
    average investment adviser is examined only once a decade. Even
    worse, the Securities and Exchange Commission reports that an
    astonishing 38 percent of investment advisers have never been
    examined, not once.
        The investing public deserves more timely oversight of
    these professionals to whom they have entrusted their hard-
    earned money, certainly more oversight than the public received
    in the Madoff case, as well as the very recent case of
    financial adviser Matthew D. Hutcheson, who is known as
    America's retirement coach, and the indictment of Mark
    Spangler, former chairman of the National Association of
    Personal Financial Advisors. This bipartisan bill helps close
    what everyone agrees is a glaring regulatory gap, a gap that
    puts average American investors at risk and undermines investor
    confidence. The Dodd-Frank Act recognized that inadequate
    investment adviser oversight is a weakness of our system.
        The SEC study mandated by Section 914 of Dodd-Frank
    presented Congress with three options. One of those options,
    which authorizes one or more self-regulatory organizations, or
    SROs, to examine investment advisers is, in my opinion, the
    most practical, comprehensive, and streamlined approach to
    address this weakness.
        But that is not the only possible solution. Obviously, two
    other options were offered by the SEC. But as SEC Chairman Mary
    Schapiro herself stated before this committee on April 15th,
    ``The ability to leverage an SRO organization is really
    critical. Look at our numbers. We examine about 8 percent to 9
    percent of investment advisers every year.''
        The Consumer Federation of America also stated in testimony
    that an SRO would be ``a significant improvement over the
    status quo.'' Others have said that more funding for the SEC is
    the answer. But the SEC itself has admitted that even if the
    agency receives the full amount of funding it and the
    Administration requested for 2013, it would be able to examine
    only 1 in 10 investment advisers annually. I understand why
    many investment advisers are not enthusiastic about increased
    oversight. No one is excited when the SEC or any regulator for
    that matter schedules an exam, but when fraud occurs and
    investors are harmed, outrage, bewilderment, and astonishment
    follow, and Members of Congress and the public then properly
    and predictably ask, ``Where are the regulators?''
        In fact, they go beyond that, and at least three Members of
    Congress have filed legislation in these cases asking the
    taxpayers to pick up the tab, or the industry. As I have said
    repeatedly since discussion of this bill began, I stand ready
    to work with anyone who has an idea on how to improve it or
    another idea. For example, some have expressed concerns about
    the exemptions in this bill. I am more than willing to work
    with any Member or interested stakeholder to address these
    concerns and thereby achieve our objective of protecting retail
    investors who use the services of investment advisers.
        The only goal of this bipartisan legislation is to deter
    bad actors and help protect the American investors. I see no
    way to do that without timely examinations. The debate over who
    conducts these examinations and how is open to debate, a debate
    that we will continue today with this hearing. I hope my
    colleagues will support this bipartisan bill that Mrs. McCarthy
    and I propose. But if they do not, I hope they will at least
    offer constructive suggestions on how to either improve this
    legislation or craft their own solution and present it for
    debate. Until something changes, American investors are at risk
    of another Madoff scandal. And that ought to be a sobering
    thought, not only for this Congress, but for investment
    advisers as well.
        At this time, I recognize the ranking member, Mr. Frank.
        Mr. Frank. Thank you, Mr. Chairman. I will take 4 minutes.
    And I appreciate the fact that we have recognition that we have
    to do a better job of supervision here. And let's be very
    clear, this is a recognition of the important interaction
    between the private market and a public element of regulation.
    Now, particular legislation would have the public sector by
    statute delegate regulatory powers to an organization not part
    of the government. And that is a valid option. But it is part
    of the scheme of regulation, and there have been too many
    people who have talked as if there was this problem if you
    tried to regulate the private sector. So I am glad to be here
    discussing how to regulate, how to use the statutory authority
    that the Federal Government has to increase regulation over an
    important part of the financial community. And as I said, an
    SRO is this, it would have power only if it is, in fact,
    delegated to us by the Congress.
        Second, one of the things I wanted to do--and I was very
    pleased that the Majority agreed to our insistence that the
    North American Securities Administrators be here. I, from time
    to time, had the privilege of listening to the Secretary of the
    Commonwealth of Massachusetts, Bill Galvin, who is an
    outstanding regulator, very active. We have today Mr. Morgan
    from Texas. Too often, there is an irony here, frankly,
    including some of my conservative friends who generally want to
    talk about Federalism and the limits of State power, and we act
    as if the States are not a factor here.
        State regulation is very important. And I have had a chance
    to read, and I won't be able to stay, but a very thoughtful
    testimony from our Texas commissioner, and I hope that the
    members will be taking seriously the points that he makes. We
    should not be--we have a Federal statutory authority here that
    we have given to the SEC, and when we talk about how to share
    that, we should not share the States' role and subject the
    States to this role without their full participation.
        This is not just an SEC/CRO division, it is a three-way. It
    is the SEC and it is the States. And there are some very useful
    statutes. I see the State--and this is the North American
    Securities Administrators, which in this case are the Canadians
    as well, which is relevant because we don't have a sharp border
    here when it comes to security. The criticisms in a
    constructive way that the Commissioner makes should be taken
    into account.
        Finally, I want to get to the role of the SEC. And yes it
    is true if the SEC was given only what the President asked for,
    they wouldn't be able to do as much as they should. The
    President didn't ask for enough. We are talking about
    relatively small amounts of money here. We are talking about an
    SEC appropriation of $1 billion and some hundreds of millions.
    I like to have units of measurement. One unit of measurement it
    seems to me that would be useful when we talk about funding our
    regulatory agencies is a JPMorgan Chase derivative loss. A unit
    should stand for how much JPMorgan Chase lost in one set of
    derivative transactions. It is about $3 billion now--in that
    one set of transactions, JPMorgan Chase lost more than the
    total budgets of the SEC and the CFTC combined.
        The argument that we can't afford I think is feckless. What
    we need to do in the first place, and I think we can impose
    more on the industry, but my final point is, I would first like
    to fully fund the SEC. We had a very good hearing, Mr.
    Chairman, and I am glad you held it, on the constraints the SEC
    faces with regard to resources, which may lead them sometimes
    as they acknowledge to settle on less terms than they should,
    less rigorous terms for people who have done things wrong.
        So at the very least, the very fact that we are considering
    an SRO argues strongly against the inadequate funding that this
    Congress has give the SEC. I don't think the President asked
    for enough. We voted for even less. In the next couple of
    months, we will be considering the CFTC and the SEC, and one of
    the arguments that this bill should make clear is we need to
    and can very well afford the relatively small amounts of money
    for increasing their funding.
        Chairman Bachus. Mr. Garrett for 2 minutes.
        Mr. Garrett. Thank you. Thank you, Mr. Chairman, for
    recognizing me and for holding this hearing today, and for your
    legislation as well, to create an SRO for retail investment
    advisers. I certainly commend the chairman for his leadership
    on this issue, which is a very complicated and challenging
    issue.
        Ensuring adequate protection exists for all retail
    investors is a top priority, not only for the chairman, but for
    this committee as well. The multi-billion dollar Bernie Madoff
    fraud has made a detrimental impact on literally thousands of
    families and people across this country. And it was a colossal
    and historical failure by the entity that is supposed to be the
    lead watchdog for these investors, the SEC.
        Now, the SEC in recent history has been examining
    investment advisers approximately once every 10 years, once
    every decade. And the frequency of examinations of course is
    not the only consideration. FINRA, for example, examined
    Madoff's broker-dealer unit and they did it much more
    frequently, but it still missed the fraud. So with too much on
    its plate, some of the basics aren't getting done apparently.
    For instance, the SEC now must focus more on its core mission
    of protecting investors and ensuring broader markets and
    promoting capital formation, and maybe a little bit less on
    politically-motivated agenda items like global warming and
    political donation disclosures as well. Nevertheless, I look
    forward to a robust discussion of the chairman's bill today.
        And I am interested to hear from our panel regarding their
    thoughts about how to improve accountability and transparency
    of the SRO model, and also on ideas to ensure a robust cost-
    benefit analysis is conducted for any current and also possible
    new SROs. Finally, I look forward to learning more about other
    revisions that Chairman Bachus has made to his legislation
    since we held a hearing on this topic, I guess it was back in
    the fall.
        In the end, we must work to carefully balance the need to
    sufficiently protect retail investors from doing wrong with the
    need to ensure our Nation's small businesses are not burdened
    with new and costly regulations.
        Finally, I realize there is no easy answer to this
    challenging issue, and I do give the chairman a lot of credit,
    and also his staff as well, for thoroughly examining this
    important topic. And I thank the chairman again and I thank the
    members of the panel as well. I yield back.
        Chairman Bachus. Thank you, Mr. Garrett. Mr. Lynch for 3
    minutes.
        Mr. Lynch. Thank you, Mr. Chairman. And I thank the ranking
    member as well. I would also like to thank our panel here for
    coming forward and trying to help this committee with its work.
    Over the past 5 years, we have had a series of high-profile
    Ponzi schemes and scandals that have done serious damage to the
    reputation of the investment adviser community, FINRA, the SEC,
    and Congress, all of which bear some measure of blame for the
    gaps in financial adviser oversight. But the one positive we
    can take away from these events is that we have now called
    attention to the lack of meaningful oversight of the investment
    adviser community and we provided some momentum for calls for
    meaningful reform.
        One casualty in the wake of the 2008 financial crisis and
    these aforementioned scandals is the integrity of the financial
    services industry. All of us here today want the same thing
    basically, and that is for the American people to have the
    confidence that when they entrust their savings to investment
    advisers, those funds are invested appropriately and prudently.
        I do applaud the sponsors of H.R. 4624 for putting forward
    a thoughtful approach to improving investment adviser
    examinations. I believe this bill is a good start. I do have
    some lingering concerns, however, about the bill, particularly
    the effect that a newly-created SRO will have on some of our
    smaller mom-and-pop investment advisers typically examined by
    the State securities administrators. And also, I believe the
    bill could do a better job of protecting the authority of State
    regulators. In Massachusetts, as the ranking member mentioned,
    we have a fairly robust examination process headed by our
    Secretary of State, Bill Galvin. He does a good job at this. I
    would not want to see him shunted to a secondary role or
    perhaps banned from doing his good work.
        I also think that by making the SRO the sole game, so to
    speak, you are also increasing the burden on some of these
    State-registered advisers. So hopefully, we can together
    examine ways to accomplish some of the refinements that I think
    are necessary with the witnesses that we have today. We have a
    great group, and I look forward to a productive discussion. And
    I want to thank you again, Mr. Chairman, and the ranking member
    for the work you have done on this important issue. I yield
    back the balance of my time.
        Chairman Bachus. Thank you. Are there any other Members who
    wish to be heard? Mr. Scott for 3 minutes.
        Mr. Scott. Thank you, Mr. Chairman. First of all, I think
    that this hearing is very important. It is very timely. The
    consumer and investment confidence is waning. We need to take
    some constructive steps to make sure consumer confidence is
    high. I think that the general thrust of this is that there is,
    and I think we all can agree, a critical gap in investor
    protection. And I think that this is supported by some
    information that in 2011 the Securities and Exchange Commission
    reviewed only 8 percent, only 8 percent of over 12,000
    registered investment advisers. And this is compared to FINRA's
    examination of 58 percent of its registers in the same year.
        I would say to you, if that was put before the investment
    community, they would go for examining at the 58 percent level
    to make sure this doesn't happen. So I think that we really,
    really need to look at this bill. I think it is a good
    foundation, as any legislation is. I think that investment
    advisers and broker-dealers are, in fact, inherently different.
    So if that is the case, why subject investment advisers to the
    same type of SRO that broker-dealers are currently subjected
    to?
        And so, we have some really serious questions on the
    preemption level. If this bill preempts the States from
    regulating registered investment advisers, then the question
    becomes, aren't the States preempted from regulating brokers?
    So I think we have a lot of issues here on the table. I think
    this bill is a good start. I commend both Mrs. Maloney and
    Chairman Bachus for putting forward the bill and I look forward
    to working with it and moving this whole approach forward and
    making sure that paramount in our minds is making sure that
    investor confidence regains the high plateau that it once was
    before the Bernie Madoff scandal and so many others. Mr.
    Chairman, with that I yield back the balance of my time.
        Chairman Bachus. We have approximately 2 minutes left on
    our side, and none on the other side. What we are going to do
    is increase to three on our side, and one on your side--we are
    going to cede you all 1 minute, which will give Mrs. McCarthy 2
    minutes, Mr. Hinojosa wants a minute, and then I will take the
    one remaining minute.
        Mr. Frank. Mr. Chairman, thank you. That is very gracious.
        Chairman Bachus. Thank you. Mrs. McCarthy?
        Mrs. McCarthy of New York. Thank you, Mr. Chairman. And I
    thank the ranking member. I usually don't do opening
    statements. I always want to come to these hearings to hear the
    witnesses. I think there has been a lot of misinformation on
    the bill. And obviously, we have a hearing to clear up the
    misinformation that is out there. But also, this is the first
    step. We go forward, we work, there will be amendments before a
    markup. I happen to think that this is a great start. We keep
    talking about Madoff, but let me tell you, in New York and Long
    Island, we have had many, many cases of fraud, unfortunately,
    and that hurts my investors. And I think it is something that
    we need to do. I think that also, you will see when the bill is
    exactly explained that the States are still going to have the
    oversight. We are going to be working with the States. This is
    going to be a partnership.
        Would I prefer if we went through the SEC? Absolutely. Are
    we going to get the money to do it? No, we are not. I would
    love to, but it is just not going to happen. So to me, this is
    a great start. This is where certainly we can protect our
    constituents. And I think that is the bottom line for all of us
    to do. So with that, Mr. Chairman, I yield back the rest of my
    time.
        Chairman Bachus. Thank you.
        Mr. Hinojosa?
        Mr. Hinojosa. Thank you, Chairman Bachus, and thank you,
    Ranking Member Frank, for holding this hearing today. And thank
    you to our esteemed panelists for your testimony, which I look
    forward to hearing. I wish to speak about two issues in
    particular that concern me about creating a new self-regulatory
    organization or adding more jurisdiction to FINRA's oversight.
    I have heard from small independent advisers by calling them
    and asking for their opinion, and they are advisers with less
    wealthy clients in my congressional district who will be
    subject to a new added expense for regulatory oversight if this
    policy takes place. They are concerned about the effect of
    member fees on their ability to serve as independent advisers.
    With that, I yield back, Mr. Chairman.
        Chairman Bachus. Thank you. We have a little over a minute
    remaining on our side. Let me point out three things. First,
    Madoff has been mentioned, that FINRA missed Madoff. FINRA
    regulated the broker-dealer side of Madoff. It was on the
    investment adviser side where the fraud went on, so they could
    not regulate that. That was up to the States and the SEC where
    that fraud took place.
        Second, I can say that State regulators have done an
    exceptionally good job. I think they have done a better job
    than Federal regulators. And they now, under this bill, will
    regulate not only the small investment advisers, but also the
    mid-sized investment advisers. In fact, after the Dodd-Frank
    transfer occurs, the SEC will oversee approximately 10,000
    investment advisers and the States will take on approximately
    4,200 additional investment advisers with up to $100 million in
    assets under management, according to my staff's estimate. And
    we want to be very sensitive to the State regulators and make
    sure that this bill does not preempt your ability.
        I know there has been some expression, and I know Mr.
    Ketchum has said several times he wants to have better
    cooperation, and I think that is key. And if there is something
    else we need to do. I know the State actor doctrine, I have
    heard cases where the State regulators contacted FINRA, and
    FINRA said, ``We can't go into that because it is a State
    action.'' And I am not sure that is a good situation. That
    needs to be refined. But we very much want to do what is right.
        And the third point is, and Mr. Morgan said that some of
    the investment advisers, regulatory fatigue. We don't want to
    unnecessarily burden investment advisers. But at the same time
    we do want to, they need to be examined, and I think they agree
    with that. And I think we are all open to saying that it is not
    duplicitous or that it is not overbearing. And this is not a
    markup, this is a hearing, and there is a big difference.
    People out in the public may not know the difference, but you
    gentlemen know the difference. I am very sensitive to State
    regulation. I think States have done an outstanding job. I know
    independent advisers in Alabama usually behave because of Joe
    Bohr.
        Mr. Frank. Mr. Chairman, I have an unanimous consent
    request--
        Chairman Bachus. Without objection, it is so ordered.
        Mr. Frank. --to enter into the record four statements from
    an individual in some organizations in opposition to the bill,
    in some cases, in principle, in some cases, as drafted. One is
    from the Project on Government Oversight. Another is from
    Professor Ernest Young at Duke Law School. One is from the
    Financial Planning Coalition. And one is from the Consumer
    Federation of America. And I ask unanimous consent that they be
    introduced. And my colleague from North Carolina, I believe had
    a similar unanimous consent request.
        Mr. Watt. Mr. Chairman, I was going to offer for the record
    the letter to you and Mr. Frank from Professor Ernest Young.
    But I assume that is the same letter that is being entered into
    the record.
        Mr. Frank. I apologize for preempting North Carolina's
    representation on one of its premier institutions. It is the
    same guy.
        Mr. Watt. I have to look out for my little brother
    institution.
        Chairman Bachus. Without objection, those letters are
    introduced. And the coalition is actually a coalition of three
    different financial planning groups.
        Mrs. Maloney. May I have unanimous consent to put my
    opening statement into the record?
        Chairman Bachus. Okay. Without objection, all Members'
    opening statements will be made a part of the record.
        Ms. Waters?
        Ms. Waters. I ask unanimous consent to have my opening
    statement entered into the record.
        Chairman Bachus. So ordered. With that, we will hear from
    our esteemed panel: Mr. Dale Brown, president and chief
    executive officer of the Financial Services Institute; Mr.
    Thomas Currey, past president, National Association of
    Insurance and Financial Advisors; Mr. Chet Helck, chief
    operating officer, Raymond James Financial, Inc., on behalf of
    SIFMA; Mr. Richard Ketchum, chairman and chief executive
    officer, the Financial Industry Regulatory Authority; Mr. John
    Morgan, Securities Commissioner of Texas, on behalf of the
    North American Securities Administrators Association; and Mr.
    David Tittsworth, executive director and executive vice
    president, the Investment Adviser Association.
        We welcome all you gentlemen. And Mr. Brown, you can
    proceed with your opening statement.

       STATEMENT OF DALE E. BROWN, PRESIDENT AND CHIEF EXECUTIVE
              OFFICER, FINANCIAL SERVICES INSTITUTE (FSI)

        Mr. Brown. Thank you, Mr. Chairman. I am Dale Brown,
    president and CEO of the Financial Services Institute, and I am
    pleased to express our support for the Investment Adviser
    Oversight Act. We urge the committee at the right time to
    approve this bill because it will protect Americans who need
    investment advice. An effective regulatory structure for all
    financial advisers is a critical component to building and
    maintaining the trust of American savers and investors. FSI's
    more than 100 member firms and 35,000 financial adviser
    members, most of whom are small businesses, work with middle-
    class investors across America. Our members are regulated under
    both broker-dealer and investment adviser rules. They rely on
    their personal reputations to earn and maintain trusted client
    relationships. They have a powerful incentive to put their
    client's interest first and to embrace the highest ethical
    standards and most effective oversight that will bolster their
    client's trust.
        These clients are saving and investing for retirement, for
    their children's educations, and to care for their aging
    parents. Today, a middle-class family who wants professional
    help with investing their kid's college fund has no real way of
    knowing if someone is checking up on their investment adviser.
    FINRA might have audited their adviser in the last 2 to 3
    years, or that adviser might not have seen an SEC examiner
    since 1999, if at all.
        American investors should not have to be regulatory experts
    to know whether they are being protected. There are many
    reasons for this unacceptable regulatory gap, but the question
    today is, how do we close it? We believe H.R. 4624 is the best
    solution for this urgent investor protection problem. The bill
    would shift the responsibility for investment adviser
    examinations from the SEC to an independent regulator paid for
    by the industry, not taxpayers. This would free the SEC to
    regulate the regulator as it has done for decades for the
    brokerage and municipal securities industries, among others.
        The Dodd-Frank Act identified this serious regulatory gap.
    Under the status quo, broker-dealers face routine examinations
    every 2 to 3 years. In contrast, the typical investment adviser
    is examined on average once every 13 years. The SEC told this
    committee that it had examined only 8 percent of registered
    investment advisers in 2011. They also revealed that nearly 40
    percent have never been examined, not even once. This is not
    acceptable. In its Section 914 study, the SEC called it very
    unlikely that they will ever have the resources to conduct RIA
    examinations with adequate frequency. Their recommendations
    laid the groundwork for this bill--18 months ago, FSI endorsed
    FINRA as the best choice for an independent industry regulator
    for retail investment advisers.
        FINRA already has a solid working relationship with the SEC
    and an infrastructure in place that it can adapt quickly to
    supervise and examine RIAs. I am avoiding the term self-
    regulatory organization and SRO because frankly they have
    become misnomers, implying that the industry regulates itself.
    This is simply not true under FINRA. FINRA's governing board is
    a majority of non-industry public members and their staff are
    professional experienced regulators. We have no illusions that
    FINRA is a perfect regulator. Some of the criticism it is
    receiving is valid. Many credible observers, such as the GAO,
    have documented areas in which FINRA can improve its
    transparency and accountability. FINRA should embrace these
    reforms as it continues to improve as the broker-dealer
    regulator and become the investment adviser regulator.
        The issue of cost associated with H.R. 4624 is important
    and shouldn't be downplayed. The hard truth is that any remedy
    for this unacceptable regulatory gap will cost money. We have
    an opportunity to solve the problem in a way that does not
    burden the taxpayer and closes this gap quickly and cost-
    effectively. The Bachus/McCarthy proposal does just that. I
    have many friends in the industry, including some FSI members,
    who are adamantly opposed to this bill. I respect their views,
    but the status quo is not acceptable. So let us work together
    toward a practical solution that will benefit American savers
    and investors. It is the right thing to do.
        Thank you, Chairman Bachus and Congresswoman McCarthy, for
    taking this critical bipartisan step forward. We urge the
    committee to pass this bill as quickly as possible. Thank you
    very much.
        [The prepared statement of Mr. Brown can be found on page
    44 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Currey?

        STATEMENT OF THOMAS D. CURREY, PAST PRESIDENT, NATIONAL
        ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS (NAIFA)

        Mr. Currey. Good morning, Chairman Bachus, Ranking Member
    Frank, and members of the committee. My name is Tom Currey, and
    I am here on behalf of the of the National Association of
    Insurance and Financial Advisors, or NAIFA. For more than 30
    years, I have been licensed as a registered representative of
    my broker-dealer, and for more than 10 years, I have been
    licensed as an investment adviser representative for my
    corporate RIA. This is in addition to my insurance licenses in
    Texas and California.
        I appreciate the opportunity to share with you why NAIFA
    supports the Investment Adviser Oversight Act of 2012. NAIFA
    has always supported smart, balanced regulation that provides
    consumer protections without creating compliance burdens that
    would impede our members' ability to serve the middle market.
    H.R. 4624 satisfies those criteria.
        NAIFA members are largely small business owners serving the
    middle class. Most of our clients have household incomes of
    less than $100,000, with less than $50,000 invested in
    financial markets. And that is true for my practice as well. My
    clients--who span several generations; I am now working with
    children of some of my early clients and even, in some cases,
    grandchildren--average between $50,000 and $250,000 investable
    assets, and almost all of them had less than $50,000 to invest
    before we started working together on their financial plans.
        In short, we are Main Street, not Wall Street. We help Main
    Street investors achieve their financial goals by offering them
    financial advice and services they can afford. Two-thirds of us
    are broker-dealer registered reps and like me, about 40 percent
    of the registered reps are also investment adviser
    representatives. Today, we spend an average of nearly 530 hours
    every year on compliance and examination costing us more than
    $8,800 annually, a substantial amount of time and money, since
    many members may only have one additional person on staff.
        Today, the SEC only examines 8 percent of investment
    advisers every year, and one-third of investment advisers have
    never been subject to an SEC compliance exam. FINRA, on the
    other hand, examined 57 percent of its broker-dealer members in
    2008 and 54 percent in 2009. NAIFA members are generally
    audited by their broker-dealers annually, but there is no
    consistent examination practice for investment adviser
    representatives. There is a consensus that the gap between
    these two regimes should be filled.
        From NAIFA's perspective, allowing FINRA to serve as the
    SRO for investment advisers is the logical way to fill the gap.
    The Investment Adviser Oversight Act would get us there. And
    virtually all of our members who are investment adviser
    representatives are also broker-dealer registered, thus, they
    and the broker-dealers with which they are affiliated already
    are subject to FINRA oversight. Requiring broker-dealers and
    investment advisers to be subject to two distinct regulatory
    regimes and corresponding examination processes is burdensome
    and unnecessary.
        This is in no one's interest. Coordination of the rules and
    examinations for both sides of the business, however, would
    best serve all constituents' interest. Simultaneous broker-
    dealer and registered investment adviser exams would not only
    lead to a more effective examination process; it would be less
    burdensome and intrusive for financial professionals than
    having to submit to different exams at different times in order
    to comply with the rules and schedules of different regulators,
    or SROs.
        It would clearly be more efficient and cost-effective for
    NAIFA members if FINRA were allowed to expand its current
    substantial examination capabilities to cover registered
    investment advisers than it would be to subject NAIFA members
    to a new SRO or to the SEC to perform this function.
        Our hope is that the final result of this process will be
    an efficient regulatory scheme that protects middle market
    investors and the professionals who serve them. NAIFA is eager
    to continue working with the committee to ensure that investors
    are protected and have access to competent financial advice and
    services. Thank you very much for the opportunity to present
    NAIFA's views to you today, and I would be pleased to answer
    your questions when appropriate.
        [The prepared statement of Mr. Currey can be found on page
    73 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Helck?

       STATEMENT OF CHET HELCK, CHIEF EXECUTIVE OFFICER, GLOBAL
        PRIVATE CLIENT GROUP, RAYMOND JAMES FINANCIAL INC.; AND
     CHAIRMAN-ELECT, THE SECURITIES INDUSTRY AND FINANCIAL MARKETS
                          ASSOCIATION (SIFMA)

        Mr. Helck. Chairman Bachus, Ranking Member Frank, and
    committee members, my name is Chet Helck. I am chairman-elect
    of the Securities Industry and Financial Markets Association,
    known as SIFMA. I also am the CEO of the global private client
    group for Raymond James Financial, which has over 6,000
    financial advisers operating in 2,500 locations in all 50
    States, and who serve over 2 million client accounts.
        SIFMA supports H.R. 4624 as introduced by Chairman Bachus
    and co-sponsored by Representative McCarthy. We believe this
    bill will result in enhanced oversight of retail investment
    advisers, and thereby better serve and protect individual
    clients. Over the years, the retail advisory services of
    investment advisers and broker-dealers have converged. Today,
    broker-dealers provide some of the same services as investment
    advisers. We believe that the same services should be held to
    the same standard. That is why SIFMA supports the establishment
    of a uniform fiduciary standard for brokers and advisers when
    they provide personalized investment advice about securities to
    retail clients.
        We also believe that when brokers and advisers provide the
    same service, they should be subject to the same level of
    examination and oversight. Currently, broker-dealers are
    subject to FINRA, SEC, and State regulation and are generally
    inspected by FINRA biannually, and in larger firms such as
    ours, much more frequently. Investment advisers, however, are
    not subject to oversight by a so-called SRO and are inspected
    by the SEC only about once every 11 years. This gap in
    oversight is unacceptable and must be addressed given the
    billions of dollars of client assets that are entrusted to
    retail investment advisers. Individual clients would be better
    protected by consistent standards for and consistent
    examination and oversight of investment advisers and broker-
    dealers that provide retail advisory services.
        We support H.R. 4624 because we believe it will directly
    benefit and protect the investing public. We note that last
    year, the SEC was only able to examine 8 percent of registered
    investment advisers. Since 2004, the number of SEC examinations
    has decreased by nearly 30 percent and the frequency by 50
    percent. To increase the frequency of examination to acceptable
    levels, SEC Commissioner Walter stated that the SEC would need
    to add more than 2,000 examiners to its advisory program. Of
    course, individual investor protection requires more than just
    proper examination or audit levels. The oversight afforded by
    an SRO would better ensure that retail investor advisers
    develop and maintain policies, procedures, and systems
    necessary to meet the ongoing obligations in their individual
    clients at the highest levels.
        A retail adviser SRO with oversight over the thousands of
    IRAs that are not regularly examined by the SEC today would
    effectively supplement the SEC's resources in the same way that
    FINRA supplements the SEC in the oversight of broker-dealers.
    In our view, the so-called adviser SRO option most directly
    answers the question posed by Congress under Dodd-Frank,
    Section 914, because it would, in fact, increase the frequency
    and number of examinations for retail investment advisers. But
    let us be clear about the term ``self-regulatory
    organization,'' or SRO.
        We need to understand that the term is a misnomer. Here we
    are not asking an industry to self-regulate or police itself.
    On the contrary, today, regulatory organizations like FINRA are
    independent and self-funded and their priority is to protect
    investors. As recently as 2010, Congress recognized this shift
    when it expanded the Municipal Securities Rulemaking Board's
    (MSRB's) regulatory authority and remodeled the MSRB's board of
    directors after FINRA's as a majority public board.
        Today, the term ``independent self-funded regulatory
    organization,'' or IRO, is the more accurate way to describe
    and convey the integrity and quality of the modern financial
    services regulatory organization. This is the type of
    regulatory organization that H.R. 4624 would authorize and that
    we would support. At the same time, we should recognize that
    this bill represents a key opportunity to improve upon the
    existing SRO regime, to improve upon FINRA, and to take what is
    working well at FINRA and other SROs and build upon it to
    create an optimal regulatory organization for retail investment
    advisers.
        Specifically, we support the bill's approach to the
    rulemaking process for adviser SROs and the requirement for the
    SRO to consider costs and benefits. We do believe, however,
    that the cost-benefit requirements should be enhanced to
    improve the transparency and accountability of the SRO. We also
    believe that both rulemaking procedures and cost-benefit
    requirements should be equally extended and applied to broker-
    dealer organizations like FINRA.
        In closing, we support H.R. 4624 because it creates a
    retail adviser SRO that will increase the amount and frequency
    of oversight to an appropriate level and also help ensure a
    uniform level of oversight consistent with uniform standard of
    care for brokers and advisers. Accordingly, we fully expect the
    bill will better protect and serve individual clients. Thank
    you.
        [The prepared statement of Mr. Helck can be found on page
    81 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Ketchum?

     STATEMENT OF RICHARD G. KETCHUM, CHAIRMAN AND CHIEF EXECUTIVE
      OFFICER, THE FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

        Mr. Ketchum. Thank you. Chairman Bachus, Ranking Member
    Frank, and members of the committee, I am Richard Ketchum,
    chairman and CEO of the Financial Industry Regulatory
    Authority, or FINRA. On behalf of FINRA, I would like to thank
    you for the opportunity to testify today. No one involved in
    regulating securities and protecting investors can be satisfied
    with a system where only 8 percent of investment adviser firms
    are examined each year by the SEC. Yes, that is the system we
    have today. It is an unacceptably low level of oversight and
    represents a major gap in investor protection. The many
    Americans who choose to invest through advisers deserve better.
    Further, because broker-dealers and investment advisers operate
    under vastly different levels of oversight, firms offering
    similar services can arbitrage regulation. They may simply
    choose the form of registration that offers the least oversight
    and minimizes the risk of enforcement against misconduct.
        H.R. 4624 represents a direct bipartisan response to this
    problem and would help fill the gap in the protection of
    investment adviser clients. Specifically, the legislation
    addresses the current lack of government resources and allows
    self-regulatory organizations to assist in providing closer and
    more regular oversight of investment advisers who serve
    predominantly retail customers.
        The SEC oversees more than 12,000 investment advisers, but
    in 2010 conducted only 1,083 exams of those firms due to lack
    of resources. This means that the average registered adviser
    could expect to be examined less than once every 11 years.
    Further, approximately 38 percent of advisers registered with
    the SEC have never been examined. By contrast, the SEC and
    FINRA examine more than 50 percent of broker-dealers annually.
        The SEC study on investment adviser exams released last
    year concludes that the Agency will not have sufficient
    capacity in the near or long-term to conduct effective
    examinations of registered investment advisers with adequate
    frequency. This gap in investment adviser oversight is a
    significant threat to the protection of advisory clients and
    should be addressed as quickly as possible. The bipartisan
    legislation introduced by Chairman Bachus and Congresswoman
    McCarthy would establish SEC authority for designating adviser
    SROs and set a framework of requirements for any entity
    designated as such.
        These requirements would ensure that the oversight by any
    adviser SRO reflect the nature and diversity of the investment
    advisory industry and ensure that investment advisers are
    examined regularly. H.R. 4624 would guarantee that adviser SROs
    perform regular examinations on investment advisers while not
    imposing unnecessary burdens. The legislation would also
    provide assurance that a registered representative who wears
    two hats could not escape inspection as an investment advisory
    representative even while being subject to SEC oversight as a
    broker-dealer--SRO oversight as a broker-dealer representative.
        In addition, the legislation would also ensure that the
    Investment Advisers Act is enforced and that those advisers who
    commit serious offenses will be disciplined, and if necessary,
    removed from the industry.
        It is important to note the important consideration the
    bill gives to SRO structure and oversight. The legislation sets
    out criteria for governance that would require any adviser SRO
    to have a majority public board. It also includes members of
    the investment adviser industry. Also, the legislation
    establishes a high standard for SEC approval of SRO rules in
    the adviser area and a requirement for consultation with the
    SEC in developing an examination program for investment
    advisers.
        We support that approach. The concept of an SRO for
    investment advisers is not a new one. The SEC recommended
    establishing an investment adviser SRO in the special studies
    securities markets conducted in 1963. In 1989, the Commission
    submitted legislation to Congress that would authorize an SRO
    for investment advisers. In the nearly 5 decades that have
    passed since the adviser SRO concept was first introduced,
    protections afforded to investors have only waned. It is clear
    that none of the approaches taken during that time have allowed
    oversight to keep up with the growth in the adviser industry.
        This situation must be addressed in a way that delivers
    real and timely results for investors. Just as FINRA, the SEC,
    and the States work together in overseeing broker-dealers, we
    believe government regulators and SROs could have the same
    valuable collaboration relative to investment advisers.
    Providing the SEC authority to designate one or more SROs to
    assist in overseeing investment advisers is the most practical
    and efficient way to address this critical resource and
    investor protection issue.
        Finally, Mr. Chairman, let me end by addressing the very
    legitimate concerns raised by a number of members of the
    committee with respect to the impact on small investment
    advisers. Let me be clear, the bill provides that with respect
    to any State program that has an active exam program, the SRO
    would not engage in oversight examinations. I want to assure
    you that with respect to any members of FINRA of an investment
    adviser--SRO, that we would expect that fees for those entities
    with respect to States that have an active program to be
    extremely low. As an example of that, out of our less than
    5,000 firms, 1,700 of those firms paid less than $1,000 in 2011
    as a matter of fees. I can assure you that we would look as
    well for those compliant investment advisers who are subject to
    active State oversight to pay extremely low fees. Thank you
    very much. I look forward to answering any questions you may
    have.
        [The prepared statement of Mr. Ketchum can be found on page
    94 of the appendix.]
        Chairman Bachus. Thank you.
        Commissioner Morgan?

    STATEMENT OF JOHN MORGAN, SECURITIES COMMISSIONER OF TEXAS, ON
        BEHALF OF THE NORTH AMERICAN SECURITIES ADMINISTRATORS
                       ASSOCIATION, INC. (NASAA)

        Mr. Morgan. Good morning, Chairman Bachus, Ranking Member
    Frank, and members of the committee. I am John Morgan, the
    Securities Commissioner of Texas and a member of the North
    American Securities Administrators Association, NASAA, the
    association of State and provincial securities regulators, and
    I am honored to be here today on behalf of NASAA to discuss
    H.R. 4624. I would like to emphasize just a few points and I
    would like to do so by using my State as an example. Texas is
    different in some ways from other States, but the same in many
    others. It is known for having a tough securities law
    enforcement program. And the number of indictments and
    convictions for securities fraud and related offenses every
    year is a reflection of that. But it is also a State that works
    to strike a regulatory balance that is not overly burdensome
    and fosters economic development while maintaining important
    investor protections.
        It is home to about 1,100 investment advisers registered
    and regulated solely by Texas. And just like other States, the
    firms registered in Texas are located in communities throughout
    the State. These are not just in the big cities. They are in
    places like Flint, Jacksonville, Beeville, Alice, and Farwell,
    where small firms are working in their communities to help
    residents meet financial goals and save for college educations
    and retirements.
        And these are small businesses where cost really matters.
    Many have investor assets under management of $5 million to $10
    million, and for them, charging the usual 1 percent to 1.25
    percent management fee realizes an income of $50,000 to
    $125,000, and that is before rent, salaries, taxes, insurance,
    utilities, and other costs of compliance. Costs of compliance
    in Texas include a $275 registration fee each year, and keeping
    up with the extensive State regulations requiring maintenance
    of records, regulatory reporting, supervision, disclosure to
    clients, advertising, and custody of client funds.
        They must also find ways to keep up with changes to those
    regulations when they occur. And just as is the case with other
    States, these firms are subject to inspections. In Texas, these
    are on-site, unannounced inspections, and generally occur on a
    5-year cycle. But additional funding approved during the last
    session of the Texas legislature should enable the agency to
    improve the cycle to about 4 years going forward. That is good,
    but it is not as good as some other States with 1- to 3-year
    inspection cycles. A recent survey of NASAA jurisdiction shows
    that 89 percent of States conduct on-site inspections on a
    formal cycle of 6 years or less.
        There are a very small number of States that take a
    different approach. These States may benefit from the ability
    going forward to augment their examination capabilities, but
    that should be studied, tailored to the needs of that
    jurisdiction, and addressed at the direction of that
    jurisdiction. H.R. 4624, as drafted, would require firms
    already well-regulated by the States to become members of a
    self-regulatory organization. That is not necessary. There is
    no regulatory gap there. But worse is the requirement of
    membership costs and ongoing costs of compliance with the new
    self-regulatory organization.
        Much has been said in recent weeks regarding the potential
    cost burden on investment advisers generally, although it is
    unclear the size of the burden on State-registered investment
    advisers. One thing is known, the economics for many State-
    registered investment advisers plainly indicates that it is
    perilous for these firms to be forced to bear the weight of
    another layer of regulation and cost, particularly when it is
    unnecessary to do so. I have heard from a group of these firms
    in Texas who are very worried about this, and I have also
    spoken to individuals who help State-registered firms remain in
    compliance.
        The chorus is the same. There is regulatory fatigue. These
    small firms have already undergone significant regulatory
    changes and they just want to be able to focus on the markets
    and on their clients. They have said that small advisers will
    see the advent of a new regulatory body as the final straw, and
    will simply close their doors, and those are their exact words.
    A survey of investment advisers registered in Massachusetts
    released last week by Secretary of the Commonwealth William
    Galvin showed that about 40 percent responding to the survey
    provided comments suggesting that the bill as presently drafted
    would force them out of business.
        Mr. Chairman, Texas and Massachusetts are very different
    places, but the message I am hearing from investment advisers
    is the same, as heard by Secretary Galvin. The unintended
    consequence of H.R. 4624 as presently written may be that of a
    job killer. There is a belief strongly held where I come from
    that regulatory oversight should be effective and not unduly
    burdensome. And the States that do this work as I have
    described are performing that work in that exact way with
    respect to investment adviser regulation, and they absolutely
    need to be excluded from whatever solution is created to
    address the regulatory gap that has been identified at the
    Federal level. Thank you for the opportunity to speak with you
    today.
        [The prepared statement of Commissioner Morgan can be found
    on page 103 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Tittsworth?

       STATEMENT OF DAVID G. TITTSWORTH, EXECUTIVE DIRECTOR AND
     EXECUTIVE VICE PRESIDENT, THE INVESTMENT ADVISER ASSOCIATION
                                 (IAA)

        Mr. Tittsworth. Chairman Bachus, I greatly appreciate the
    opportunity to provide our views today. Our organization
    represents SEC-registered investment advisory firms. Our
    members serve a wide range of clients, from individuals,
    trusts, and families, to endowments, charities, foundations,
    State and local governments, pension funds, mutual funds, and
    private funds. Our diverse membership provides a broad spectrum
    of advisory services on behalf of their clients. They perform a
    critical role in helping investors achieve their financial
    goals. When provisions of Dodd-Frank are implemented this
    summer, there will be about 10,500 SEC-registered investment
    advisers. It is critical to remember that most of these firms
    are small businesses. More than half employ fewer than 10
    employees, and more than 85 percent employ fewer than 50
    employees.
        It is also important to understand that investment advisers
    are already comprehensively regulated. Our written statement
    outlines the rigorous and extensive regulations and laws that
    all investment advisers must adhere to no matter their size or
    resources. Additional regulations are not needed to address the
    issue at hand. Indeed, the issue at hand is clear: to find the
    best way to strengthen investment adviser oversight. We
    strongly support efforts to enhance SEC inspections. Our
    members know that effective and robust oversight is essential
    to investor protection and confidence.
        While the SEC has taken steps to improve its program, we
    believe more can and should be done. Section 914 of Dodd-Frank
    directed the SEC to study how to enhance adviser examinations.
    The report issued last year is very instructive. It sets out
    three options: investment adviser user fees; an SRO for
    advisers; or extending FINRA's jurisdiction to dually
    registered firms. Of these options, the report suggests that
    user fees have the greatest advantages, and we agree.
        We have reviewed H.R. 4624 as recently introduced by
    Chairman Bachus and others. The bill mandates membership in a
    nongovernmental SRO for many SEC-registered, as well as all
    State-registered investment advisers. The bill would subject
    thousands of advisory firms to broad rulemaking, inspection,
    and enforcement authority by an SRO, in all likelihood, FINRA.
        We strongly oppose H.R. 4624. Outsourcing the SEC's
    responsibilities to an SRO is not the most efficient or
    effective way to enhance adviser oversight. The substantial
    drawbacks to an SRO outweigh any potential benefits. These
    drawbacks include insufficient transparency and accountability
    as well as greater costs.
        Other organizations agree with our position. Indeed, many
    diverse groups, including the U.S. Chamber of Commerce, GAO,
    the Cato Institute, and the Project on Government Oversight
    have catalogued the drawbacks, costs, and inefficiencies of the
    SRO model, and FINRA in particular. H.R. 4624 unfairly targets
    small businesses. Because of exemptions in the bill, smaller
    advisers are singled out for additional regulation and costs,
    while larger advisers are unaffected. The substantial costs and
    bureaucracy of an additional, unnecessary layer of SRO
    regulation and oversight would have a significant adverse
    impact on small businesses and job creation. The bill would
    also result in inconsistent regulation and encourage regulatory
    arbitrage.
        As documented in a recent Boston Consulting Group report,
    the cost of FINRA oversight will be significantly greater than
    an incremental increase in SEC resources. And at any rate, the
    SEC will incur additional costs to exercise appropriate
    oversight of FINRA. The much better alternative is to build on
    the SEC's examination program. The SEC, a governmental
    regulator accountable to Congress and the public, has more than
    7 decades of experience and expertise regulating and inspecting
    investment advisers. To achieve more robust oversight, we would
    support legislation imposing appropriate user fees on SEC-
    registered investment advisers in lieu of an SRO.
        This legislation should specify that user fees will be
    solely dedicated to an increased level of advisory
    examinations, and it should also include reporting and review
    requirements to ensure full accountability and transparency.
        Thank you again for the opportunity to testify. I would be
    happy to answer any questions.
        [The prepared statement of Mr. Tittsworth can be found on
    page 115 of the appendix.]
        Chairman Bachus. Thank you.
        Before I ask questions, I do want to clarify two things.
    Mr. Tittsworth, I think you and I disagree on whether the U.S.
    Chamber of Commerce opposes this legislation. I think I heard
    you say that.
        Mr. Tittsworth. Mr. Bachus, I don't think that they have
    taken a particular view on this legislation. The Chamber of
    Commerce issued a report last summer--
        Chairman Bachus. On SROs?
        Mr. Tittsworth. --and it was very critical of SROs and
    FINRA.
        Chairman Bachus. On their cost?
        Mr. Tittsworth. Yes, sir.
        Chairman Bachus. I agree, but they have not taken a
    position against this bill.
        Mr. Tittsworth. To my knowledge, that is correct.
        Chairman Bachus. And I think you said the SEC in their
    report indicated that they favored user fees, but I have never
    read that either.
        Mr. Tittsworth. I understand that. I guess different people
    will come to different conclusions. What I said in my statement
    is that the report suggests there are the greatest number of
    advantages to user fees.
        Chairman Bachus. It actually suggests that is the better
    path?
        Mr. Tittsworth. That is correct.
        Chairman Bachus. Does it say that, or is that your
    interpretation of it?
        Mr. Tittsworth. That is my interpretation. I would be happy
    to stand by that.
        Chairman Bachus. Yes, I have read it, and I don't see that.
    But, reasonable people can disagree.
        You talk about a user fee, that you are advocating a user
    fee being paid by investment advisers. That would be an
    increased cost, would it not?
        Mr. Tittsworth. Absolutely.
        Chairman Bachus. How much do you envision that a small
    investment adviser would pay?
        Mr. Tittsworth. That is a great question, Mr. Chairman. I
    guess the answer is: what is the additional total cost divided
    by the number of firms that would have to pay the fee? And then
    I think it would have to be adjusted based on other factors:
    the size of the firm; complexity; risk factors; and those types
    of things.
        Chairman Bachus. But if under the SRO--and I know Mr.
    Stivers has a suggestion, an amendment to make a de minimis fee
    for small investment advisers to the SRO. Would you be opposed
    to a de minimis fee?
        Mr. Tittsworth. I think that it is always hard to support
    any fees. The bottom line is, whatever approach you are going
    to take here, there are going to be additional costs. Somebody
    is going to have to bear those costs. So I think that while we
    particularly appreciate the problems of small businesses with
    less resources, I think that spreading the pain, if you will,
    is something that is going to have to happen.
        So again, I think you have to look at the total cost and
    divide that by the total number of companies that would have to
    pay either to the SEC or to Mr. Ketchum and FINRA.
        Chairman Bachus. Mr. Ketchum, the Boston Consulting Group,
    Mr. Tittsworth and, I think, two other organizations, you all
    funded a study that they made, and they were critical of the
    costs of what you all were charged. Did they ever approach you
    and ask you for information on the potential costs?
        Mr. Ketchum. No, they did not. They never talked to us once
    to understand our exam program or to have any understanding of
    how we would conduct a program with respect to investment
    advisers if we were authorized as a self-regulatory
    organization.
        Chairman Bachus. How did they create their estimate without
    talking to the SRO?
        Mr. Ketchum. I honestly can't imagine. They used a variety
    of assumptions, one of which was that, notwithstanding the fact
    that FINRA had standing an examination program for broker-
    dealers with offices around the country, with the technology to
    support it, and notwithstanding the fact that approximately 87
    percent of the registered individuals who were registered as
    investment advisers are affiliated with a broker-dealer, that
    there would essentially be virtually no synergies, they were
    wrong with that.
        They also made the assumption--because there is much to
    what Mr. Tittsworth says about the different environment and
    different business model of an investment adviser and how they
    interact with customers, they made the assumption that the cost
    would essentially be the same to look at investment adviser
    compliance as it would be for broker-dealer compliance.
        Our evaluation from the way we approach risk-based exams
    and the like again was very different from theirs. So our
    conclusions were start-up costs that were trivial compared to
    what they suggested and annual costs that were less than one-
    third of what they suggested.
        Chairman Bachus. All right. Commissioner Morgan, I
    understand Texas does have a robust examination process, but
    Georgia, Minnesota, West Virginia, and Michigan have no
    examinations whatsoever, no on-site examinations. And I am
    being told that New York doesn't even have an exam program. But
    I do understand, I acknowledge you all are doing a good job,
    and I think that there ought to be--particularly if it was a de
    minimis fee, and I am not saying an amount--but something that
    the States could be satisfied with, or maybe some credit for
    States which have a vigorous program.
        But I would like to work with you further and explore with
    maybe you and Mr. Ketchum and these other men, the
    stakeholders, including Mr. Tittsworth, that you all continue
    to pursue this, because obviously if there can be some
    agreement among yourselves, it would be, I think, obviously
    more desirable and beneficial than the Congress simply
    dictating something.
        I know that Joe Borg, the director of the Alabama
    Securities Commission, has some concerns about coordination. I
    think all the Members, both Republican and Democrat, are
    sensitive to the cost to investment advisers, because all else
    being said, I think it is like with any other thing: 95 percent
    of the people, 98 percent of the people are doing nothing wrong
    except serving their members, and there are always a few bad
    actors, unfortunately. That is why you have to have enforcement
    of some kind.
        Mr. Morgan. NASAA would be happy to work with the committee
    on the issue relating to the very small number of States.
        Chairman Bachus. And I don't know if you know, but I was
    one of the ones who advocated expanding State jurisdiction and
    going up on that, giving you more jurisdiction. And although
    you all--Texas has a lot of money, like North Dakota, but there
    are States that are not funding anywhere near the level that
    Texas is.
        But my time has expired.
        Ms. Waters?
        Ms. Waters. Thank you very much, Mr. Chairman.
        I would like to direct a question to Mr. David Tittsworth,
    executive director and executive vice president, Investment
    Adviser Association. There has been a lot of discussion of the
    cost of a user fee approach to investment adviser regulation
    versus establishing this self-regulatory organization. I know
    that the organization commissioned one study by the Boston
    Consulting Group, and FINRA has its own competing study.
        So let us just put aside the cost here for a moment.
    Independent of cost, why does your organization support a user
    fee model rather than an SRO model? I think that in the
    testimony, you described some of this, and I want to make sure
    that I understand why there would be any consideration--this
    particular legislation--in establishing the SROs that would
    have some oversight, I suppose, with the States, and that
    businesses, particularly concerned about small businesses,
    would be paying maybe a registration fee to the State and then
    to the SRO. Dodd-Frank, I think, basically did--allowed us to
    raise the threshold for these small businesses from $25 million
    to, I think, about $100 million, and it seems as if the States
    would be able to handle that adequately without an SRO. So
    explain to me, why does your organization basically support a
    user fee model rather than this SRO model?
        Mr. Tittsworth. Thank you, Ms. Waters.
        We do support appropriate user fee legislation because it
    would be the most direct, the most efficient, and the most
    effective way to enhance investment adviser oversight.
        And I might add, an appropriate user fee provision, in our
    view, would have several elements. It should be in lieu of an
    SRO. Investment advisers should not have to pay both the SEC
    user fees and an SRO. It should be absolutely dedicated to an
    enhanced level of oversight, so it would be something in
    addition to the SEC's current, baseline level. And you would
    have to have a review mechanism so that all of you, and us, and
    the public can measure whether or not the SEC is using this
    money for the intended purposes.
        Ms. Waters. I am not sure whether you are actually aware
    that I am drafting legislation that would allow the SEC to
    collect user fees to enable the examination of investment
    advisers. I don't know if you have had an opportunity to look
    at the draft that we are putting together and whether or not
    you have any suggestions for making sure that we are
    accomplishing exactly what Dodd-Frank basically recommended.
    Have you taken a look at that?
        Mr. Tittsworth. Yes, ma'am. I appreciate your efforts and
    we would be happy to continue our discussions and would love to
    support an appropriate user fee provision.
        Ms. Waters. Thank you, Mr. Chairman. I have no additional
    questions. I yield back the balance of my time.
        Chairman Bachus. Thank you.
        Mrs. Biggert?
        Mrs. Biggert. Thank you, Mr. Chairman. I yield 30 seconds
    to the chairman.
        Chairman Bachus. Thank you.
        Ranking Member Frank mentioned JPMorgan and the $2 billion
    loss, but let me put that in perspective. No public member
    investor or taxpayer lost a dime. Madoff was $46 billion, and
    yet we choose to talk about JPMorgan. Sanford was $8 billion, 4
    times as much loss, but, again, it was investors' money, it was
    people's pension funds.
        This JPMorgan loss of their own money, which represented
    about $1 out of every $1,000 that they have as assets, I think
    is motivated principally by people wanting more regulations on
    all the regulations we have. That is why we keep hearing about
    JPMorgan. I think there is an agenda there.
        But no taxpayer money, no member of the public loss money.
    We ought to be more concerned about Solyndra and that $500
    million of total loss that was taxpayer money. I am concerned
    about taxpayers and investors. I am not concerned about an
    individual or companies losing their own money as long as it
    doesn't jeopardize the system, and it is quite a stretch to
    continue to talk about that as any threat to our bank--
        Ms. Waters. Would the gentleman yield?
        Chairman Bachus. Mrs. Biggert?
        Mrs. Biggert. Reclaiming my time, because I do have
    questions.
        I have heard from a number of small advisory firms in my
    district that they fear that if they are regulated by an SRO,
    they will be subject to costly new regulations and fees that
    could put them out of business, and then there are fewer jobs,
    and no job creation.
        The objective of H.R. 4624 is to increase investor
    protection by increasing the frequency of exams of investment
    advisers. It is an important objective, but it is equally as
    important that we strike the right balance so that small
    advisory firms are not disproportionately affected.
        This question is for Mr. Tittsworth. You seem to be in the
    hot seat today. It is my understanding that SROs like FINRA are
    not required to go through a formal rulemaking process, unlike
    Federal regulators, and also don't conduct any meaningful
    economic analysis of rules. And like the Consumer Financial
    Protection Bureau, SROs are not regulators subject to
    appropriations or directly and regularly accountable to
    Congress. Would it make sense to require SROs to conduct a more
    robust cost-benefit analysis on rulemaking?
        Mr. Tittsworth. Absolutely, Ms. Biggert. And I believe in
    H.R. 4624, there is a very meager swipe at that issue. But from
    our reading of it, it does not require FINRA or an SRO to
    conduct a cost-benefit analysis. And most importantly, our
    reading is that there is no remedy in case the SRO does not
    conduct an appropriate cost-benefit analysis. So you can sue
    the SEC, and they have been sued in court, for lack of a cost-
    benefit analysis, but I don't think under the legislation, at
    least as we read it, that you would have that option with FINRA
    or an SRO.
        Mrs. Biggert. Okay. Would it be possible to achieve the
    goals of H.R. 4624 by allowing an SRO like FINRA to have a
    targeted set of authorities to examine investment advisers and
    enforce SEC-promulgated rules?
        Mr. Tittsworth. I think deleting the rulemaking authority
    for an SRO from the bill would be an improvement because that
    would certainly mitigate the opportunity to have a different
    set of regulations than the SEC. But I think there are still
    drawbacks, and part of that is an examination program should
    inform regulatory policies. So I don't think it would be good
    to separate those two functions and put them in two different
    entities.
        And at any rate, the SEC is going to bear significant costs
    in overseeing FINRA, and I think that is a point that may be
    lost in this whole debate. But the SEC is being criticized for
    not doing enough to oversee FINRA, and this bill would require
    even greater expenditure to achieve that.
        Mrs. Biggert. Having the SEC-promulgated rules, would this
    provide firms, especially the small advisory firms, some
    certainty and transparency and cost-benefit analysis in their
    rulemaking while increasing oversight of the investment
    advisers?
        Mr. Tittsworth. Yes. Having one set of rules is always most
    desirable in terms of having regulatory certainty.
        Mrs. Biggert. I think maybe you answered this: How do we
    address small advisory firms' concerns about costly fees that
    could result from the bill?
        Mr. Tittsworth. We would propose that a user fee approach
    would be much less costly, whether it is for small businesses
    or other investment advisers.
        Mrs. Biggert. All right, then, Mr. Morgan, is H.R. 4624
    clear about which entity, the SEC or an SRO, would conduct
    audits of State regulators' exams of investment advisers?
        Mr. Morgan. It appears that it contemplates that an SRO
    would do it, but it is NASAA's position that we should be
    excluded from this altogether for the reasons that I stated.
        Mrs. Biggert. Doesn't the bill require State security
    regulators to report annually to a private-sector entity such
    as SROs?
        Mr. Morgan. Yes, it does require that.
        Mrs. Biggert. And I have heard that the bill would then
    delegate to an SRO the authority to oversee States, and there
    are State sovereignty and constitutional concerns.
        Mr. Morgan. There has been an argument made about the
    constitutionality of that, and from NASAA's perspective it
    seems completely inappropriate. The State is reporting to a
    private entity. It is being required to disclose its exam
    methodology. The SRO is allowed to comment on that plan, and
    this would not be a disinterested party that would be
    commenting on the plan.
        Mrs. Biggert. Given these concerns, should the bill make
    clear that the SEC, a Federal agency, should be tasked with the
    function of oversight of State security regulators' regulation
    of investment advisers?
        Mr. Morgan. The States would have that authority. It
    shouldn't be the other way around where the States are
    reporting to the SRO.
        Mrs. Biggert. All right. Thank you. I yield back.
        Chairman Bachus. Mrs. Maloney?
        Mrs. Maloney. Thank you very much. I would first like to
    thank all the panelists for their testimony.
        And I would like to ask Mr. Ketchum and Mr. Brown to
    respond to Mr. Tittsworth's statement that the bill
    inappropriately targets small businesses with additional costs
    and regulations. It would seem to me that we would want to
    share the burden. But if the bill apparently exempts large
    investment advisers, it also exempts certain advisers based on
    the size of institutional assets, and it appears to allow them
    to choose one regulator over another, which I don't feel is a
    good policy, because I think you should have one regulator.
        But I am concerned about inappropriately putting the burden
    of the cost on the small businesses, and my question is
    directed in that area, but also why are these other areas--
    there are three or four areas that are exempted, and what is
    the policy reason for exempting large institutions over smaller
    institutions? It just seems unfair.
        But Mr. Ketchum first, then Mr. Brown, and, Mr. Tittsworth,
    if you would like to respond, as well?
        Mr. Ketchum. Sure, Congresswoman. Let me respond to both of
    your questions.
        First, from the standpoint of small advisers, as I
    indicated in my opening statement, with respect to small
    advisers and the particular concern that Mr. Morgan articulates
    very well, with respect to any State program that meets the
    requirements to have an active examination program, we would
    entirely support an amendment that any SRO fee be de minimis,
    certainly with respect to any entity that does not have serious
    compliance problems, entirely supportive.
        I would note, as I said before, that over 1,700 members of
    our less than 5,000 members pay less than $1,000 in fees to
    FINRA. We would support a de minimis standard.
        Secondly was your concern about--
        Mrs. Maloney. Do you support the exemptions, that larger
    firms should be exempt?
        Mr. Ketchum. I did want to address that as well. First a
    clarification. I don't--certainly my reading of the bill does
    not exempt large investment advisers. It provides exemptions
    for those advisers that provide advice to mutual funds or
    unregistered funds, and it provides exemptions with respect to
    entities that are predominantly providing advice to
    institutional investors.
        My experience from--
        Mrs. Maloney. So they are exempted, correct? They are
    exempted.
        Mr. Ketchum. --working at a large firm is that indeed the
    customer retail-facing side of the business that provides
    investment advice for retail investors, still very large, is
    combined with the broker-dealer in an entirely separate
    corporation. I do agree there is a potential that the
    exemptions are too broad now. I appreciate the point you made
    and that Chairman Bachus made. We would be pleased to work with
    the committee to ensure that the exemptions don't result in
    customer-facing large investment advisers being outside.
        Mrs. Maloney. Also the ability to choose your regulator.
        Mr. Ketchum. That would be one possible way to address
    this.
        With respect to the holding company exemptions that are
    built into here, there is a specific inability for the SEC to
    determine that it inappropriately exempts an entity or a
    related entity in a company.
        Mrs. Maloney. It seems like we might legislate that. Why do
    we have to rely on the SEC?
        Mr. Brown, do you have any comments on that?
        Mr. Brown. Thank you for the opportunity.
        Two quick thoughts on the issue of choosing another
    regulator. We have seen a trend in the industry for years of
    that already happening because of the disparity between the
    frequency of exec exams of RIAs both at the State and Federal
    level and the frequency of examination on the broker-dealer
    side. We certainly wouldn't want to support new legislation
    that would accelerate that, so we would expect to work with the
    committee to address that legitimate concern.
        I agree with Mr. Ketchum we need to take a look at the
    exemptions, the support, the intent to make sure that this
    increases examinations for retail investment advisers. They are
    the ones that don't have frequent enough examinations. The SEC,
    in my understanding, is already rigorously examining
    institutional advisers, mutual funds, etc., and we support
    working with the committee to identify the right balance on the
    exemptions so we close the regulatory--
        Mrs. Maloney. It seems to me that if we are going to have
    the right balance, everybody should bear the burden somewhat.
    Why should someone not have to pay the fee if there is going to
    be a fee to support this to FINRA or the SEC?
        I would like to ask a question about transparency, since
    really the heart of the whole Dodd-Frank bill was to bring
    sunlight into transactions. There have been some transparency
    concerns that were raised by people because FINRA rules are not
    subject to the Administrative Procedures Act (APA), which
    requires the standard notice-and-comment period, which is very
    important in--really in the House of Representatives, and
    regulated members have little insight as to how FINRA makes
    regulatory decisions. So I am concerned about the transparency,
    and I would like to see if Mr. Tittsworth would like to talk
    about the transparency challenge, and really anyone else.
        Chairman Bachus. We are over the time, but if you have a
    10- or 20-second response, Mr. Tittsworth, you may give it.
        Mr. Tittsworth. Ms. Maloney, I think that the Project on
    Government Oversight letter that was produced last week, and
    that I believe was introduced into the record earlier today,
    would provide a very sound response to your question about
    transparency. It is an important question.
        Mr. Ketchum. Congresswoman Maloney, let me just clarify
    that, in fact, all FINRA rules get published--or all
    substantive ones get published twice for comment. We publish
    once generally before we file with the SEC, and then it is
    published again by the SEC, and the SEC must approve it. So
    while not subject to the Administrative Procedures Act, it is
    subject to provisions that require public comment, require
    specific findings of the SEC, including findings that can
    relate to costs and benefits, and this bill even provides
    greater clarity with respect to the SEC's responsibilities.
        Chairman Bachus. Thank you.
        Mr. Garrett?
        Mr. Garrett. I thank the chairman and the panel.
        Just a couple of questions actually, and the first question
    goes to the whole panel, but I think I will start with Mr.
    Ketchum.
        It is my understanding that as current law states, there is
    no--and Mr. Tittsworth touched on this--requirement under law
    for a cost-benefit analysis to be done by FINRA, although
    obviously the regulations that you just set out of the
    procedure to go through may very well have a significant impact
    upon the economy, and also the member companies as well. And as
    you know, I have a piece of legislation that would do this for
    the SEC.
        So I would ask you, is this an appropriate time, then, in
    any legislation--whether it is this bill, modify this bill or
    some other bill--to include that in the statute?
        Mr. Ketchum. I think it is certainly an appropriate time to
    clarify the self-regulatory organizations' responsibility to
    both focus on costs, measure that versus benefits, evaluate
    alternatives, and for the SEC to evaluate that clearly with
    respect to their review. I think the SEC has been pretty clear
    lately that is how they approach even our rules with respect to
    our existing self-regulatory organizations. I think this bill
    is even clearer, and I view it entirely as our responsibility
    to look at those and to carefully evaluate alternatives that
    may have lesser costs.
        Mr. Garrett. Would any other member of the panel like to
    chime in there on the necessity in statute form for this?
        Mr. Tittsworth. If I may, Mr. Garrett?
        Mr. Garrett. Sure.
        Mr. Tittsworth. I apologize for dominating the discussion
    here, but, again, our reading of H.R. 4624 is that it does not
    require FINRA to conduct a cost-benefit analysis. And there is
    certainly no remedy other than maybe the SEC taking FINRA to
    task if they don't do the analysis.
        Mr. Garrett. Okay. Thank you.
        Aside from that one issue that I sort of harp on all the
    time, this is for the rest of the panel as well, the bill does
    go into some prescriptive--I will use the words ``prescriptive
    language'' as to what the SEC can do--look at as far as
    whatever the SRO would be going forward. Is that list
    exhaustive enough or too exhaustive? Is there something else?
    Should the legislation be more prescriptive or less
    prescriptive with regard to a potential new SRO?
        Mr. Helck. We pointed out in our comments that we felt like
    the rules should be extended to amend the 1934 Act and apply to
    FINRA so that there would be a requirement for transparency and
    cost-benefit analysis that would be consistent among all
    providers, and therefore broker-dealers should be affected by
    that as well as investment advisers.
        Mr. Garrett. Okay. Mr. Brown?
        Mr. Brown. Two quick comments. First, we would agree with
    extending the provisions to the broker-dealer side of FINRA.
    And second, we have supported your legislation that you have
    put forth to require regulatory reform in a cost-benefit
    analysis. That is appropriate.
        Mr. Garrett. Thank you.
        I will end with Mr. Tittsworth on just two points. First of
    all, what is the percentage of investment advisers who are
    stand-alone or investment advisers who are tied with a broker-
    dealer?
        Mr. Tittsworth. I believe out of the 12,000 currently
    registered advisers, which as you know will soon drop to around
    2,600, that 2,700 are affiliated. That would include 580 dually
    registered firms. I believe that is in the ballpark.
        Mr. Garrett. And is there--so for the percentage of them
    that are already under FINRA that--at least the broker-dealer
    section of them are, right? How would that work, in your mind,
    if just for that segment of the marketplace that they would be
    subject to a version of this bill, that they would be required
    to have an SRO, whether it be FINRA or otherwise, required for
    dealing with them, since they are already having the audits, as
    someone else testified here about?
        Mr. Tittsworth. I think there is a difference between
    dually registered firms, and I know some of the members of this
    panel have opposed the dually registered firms going to FINRA
    as well. FINRA would support that. But there is a difference
    between just being affiliated. You can have an investment
    adviser that is an advisory shop, a mutual fund company, for
    example, that has a limited-purpose broker-dealer for
    distribution purposes only, and I would submit to you, Mr.
    Garrett, that is much different than a firm that is
    consolidated and markets both functions actively.
        Mr. Garrett. Does anybody else want to chime in on that
    general topic?
        And for that smaller category of--and I see my time is up--
    for the smaller category that actually--not just has an
    affinity to it--how would that work for them?
        Mr. Tittsworth. For the dually registered firms?
        Mr. Garrett. Yes.
        Mr. Tittsworth. There could be legislation that would
    subject dually registered firms to SRO oversight or FINRA
    oversight.
        Mr. Garrett. And your thoughts on that?
        Mr. Tittsworth. I think that would be a better approach
    than H.R. 4624. I still think user fees would be a better
    approach.
        Mr. Garrett. Did you support user fees when the whole Dodd-
    Frank legislation was coming through the process?
        Mr. Tittsworth. We didn't support that specific provision.
    The fact that it was an open-ended authority would be my main
    objection to the way that particular provision was in the House
    version. There was also a self-funding mechanism in
    appropriations.
        Mr. Garrett. Okay. Thank you. I yield back.
        Chairman Bachus. Let me direct all the Members to page 19
    of the legislation that we have drafted. On this cost-benefit
    analysis, it says that the Commission, meaning the SEC, before
    they make a decision on how the national investor adviser
    association, whether it be FINRA or someone else, that they
    will include from the industry and consumer groups concerning
    the potential cost or benefits of the proposed rule or the
    proposed rule change and provide a response to those comments
    in its public filing with the Commission. In other words, if it
    is FINRA, the cost-benefit from all groups will be included.
    FINRA will be required to make a response to those.
        And it goes on to say that response, whether it is from
    FINRA or someone else, will include why they are adopting those
    suggestions or why they are not adopting those suggestions on
    cost-benefit analysis. So whomever is designated will be
    required to say why they are adopting those cost-benefit
    recommendations or rejecting them; and further, the reasons--if
    they reject them, the reasons they reject those specific cost-
    benefit suggestions or--so Mr. Tittsworth's group could say, we
    want to you do this. If it is FINRA, they could say, we don't
    want to do this, and here are the reasons. And then, the
    Commission would make a decision on whether or not they would
    have to adopt them.
        Now, if that is not tight enough, I think we would all be
    willing to work for some other language, but I think that is--
    certainly that is asking for a cost-benefit analysis of all
    parties, not just FINRA or the SEC, but for the industry groups
    and consumer groups to offer their cost-benefit analysis, and
    for the Commission to either adopt them or reject them, and for
    the SRO to either say they would be willing to do that or would
    not be willing to do that. So we can continue to work on this.
        Mr. Meeks?
        Mr. Meeks. Thank you, Mr. Chairman.
        I felt compelled to come down. I was listening to the
    hearing, and I heard Ranking Member Barney Frank's comment
    about JPMorgan's loss and Chairman Bachus' spot about
    protecting taxpayers from that loss. And I have to completely
    agree with Congressman Frank's comment. I think he was
    absolutely on target.
        When you think about it, we are spending more than $1
    billion a week, $1 billion a week, to control marketplaces in
    Kabul, and no one has a problem, particularly my colleagues
    across the aisle, with that. You have no problem with that. But
    when it comes to protecting our investors and patrolling our
    securities markets, it seems as though all of a sudden, my
    colleagues on the other side become Scrooges.
        The bill, as I have read it, seems to employ a convoluted
    and circular reasoning that I don't really understand. If you
    starve the SEC from funding, I don't know how they can be
    successful. And the bill lacks--the SEC lacks adequate
    resources, and thus the agency is unable to conduct
    comprehensive oversight of the investment adviser community on
    an annual basis. And then you starve the beast, and then so you
    say, let us outsource it. It just doesn't make sense to me.
        And I have, Mr. Chairman, a report that was made by the
    U.S. Chamber of Commerce's Center for Capital Markets and
    Competitiveness, which has taken a look at nongovernmental
    organizations. I ask unanimous consent to submit that report
    for the record.
        Chairman Bachus. Sure. Is that the report that came out
    about 13 months ago?
        Mr. Meeks. That is correct.
        Chairman Bachus. Without objection, it is so ordered.
        Mr. Meeks. And I ask Mr. Tittsworth whether or not you had
    an opportunity to see this report?
        Mr. Tittsworth. Yes, Congressman.
        Chairman Bachus. He actually testified about it in his
    opening statement.
        Mr. Meeks. And what would you say or what does the report
    say about the accountability of such organizations?
        Mr. Tittsworth. Congressman Meeks, the U.S. Chamber of
    Commerce report indicates that the accountability of
    nongovernmental regulators, and FINRA in particular, is
    lacking.
        Mr. Meeks. And I also would ask whether or not you are
    familiar with a brief summary from the Cato Institute that was
    given?
        Mr. Tittsworth. Yes, sir. There was a brief that the Cato
    Institute filed in December of last year with the U.S. Supreme
    Court in a case against FINRA.
        Mr. Meeks. Mr. Chairman, I also ask unanimous consent to
    include the Cato briefing as part of the hearing record.
        Chairman Bachus. Yes. We are actually operating on a rule
    that any Member can offer any evidence or documents they wish
    in support of their comments.
        Mr. Meeks. Thank you.
        Mr. Tittsworth, I was wondering whether you can give us a
    brief summary of Cato's arguments?
        Mr. Tittsworth. Yes, Mr. Meeks. And I would suggest to
    members of the committee that if you haven't read this amicus
    brief the Cato Institute filed in December, it would be very
    instructive to the issues that the committee is considering
    today.
        The Cato Institute basically talks about the lack of
    accountability and transparency with FINRA, and that no one has
    ever overseen their budget, executive compensation, biased
    arbitration system, and many other issues.
        Mr. Meeks. And finally, Mr. Tittsworth, and I have just
    been looking, but a Republican, Mr. Paul Atkins, who previously
    served as an SEC Commissioner, testified before this committee
    last fall. He included in his opinions the subject of FINRA
    serving as an SRO for advisers, and he said, ``Perhaps most
    concerning is the lack of transparency. While FINRA and other
    SROs can enact rulemakings that carry the force of law, they
    are not subject to the Administrative Procedures Act, Freedom
    of Information Act requests, and are not required to conduct
    any cost-benefit analyses. The disciplinary process raises due
    process concerns. Its board meetings are private and not
    subject to the Sunshine Act, of course. This lack of
    transparency and accountability to either the SEC, its members,
    or the public is a real concern underlying the present
    discussion over delegating authority to oversee investment
    advisers. I must raise serious concerns regarding expanding
    FINRA's empire without a fundamental reevaluation of its
    statutory functions and organization.''
        What do you think about that position; do you agree or
    disagree?
        Mr. Tittsworth. I certainly agree.
        Chairman Bachus. You have time for a 10-second response.
        Mr. Tittsworth. I agree with it, Congressman.
        Chairman Bachus. That is even better.
        Mr. Neugebauer?
        Mr. Neugebauer. Thank you, Mr. Chairman.
        When I was listening to the testimony of the panel today,
    basically I think there is a common theme here, and I will just
    kind of go down the row here. But I think, Mr. Brown, you said
    that currently, you don't think the SEC is doing an adequate
    job in overseeing investment advisers? Is that a yes or a no?
        Mr. Brown. Yes.
        Mr. Neugebauer. I am sorry?
        Mr. Brown. Yes, sir, that is correct.
        Mr. Neugebauer. And, Mr Currey, would you say they are not
    doing an adequate job?
        Mr. Currey. It appears so.
        Mr. Helck. I agree.
        Mr. Tittsworth. I also agree.
        Mr. Neugebauer. So I am listening, and one of those kind of
    a common theme in Washington, and that is when we have a
    regulator that is not doing their job, we go create another
    regulator. And I respect what the chairman is trying to do.
    Everybody agrees that the SEC is not doing their job, so he is
    trying to introduce or has introduced an idea.
        I think the thing that troubles me is that when we--people
    brought up Mr. Madoff and Stanford. Again, that was the result
    of a regulator not doing their job. On several occasions, we
    have had hearings on both of those issues, and we brought to
    people's attention within those agencies that there was a
    problem, and the regulator, unfortunately, ignored that.
        And so what I am trying to get my arms around is, when are
    we going to just start holding the regulators accountable and
    making sure they are doing their job rather than creating new
    regulations and new regulators? Because what we--in many cases,
    that is how we ended up with Dodd-Frank is rather than go back
    and identify where there was regulatory failure, we just threw
    a big whole new blanket of regulations and new regulators over
    the entire financial market. And so, I am trying to get my arms
    around how creating another regulator fixes the problem if we
    are not holding regulators accountable that currently have that
    responsibility?
        Mr. Brown, do you want to take a shot at that?
        Mr. Brown. That is a great question. Thank you very much.
        I think this bill creates an opportunity to do just that,
    to start holding FINRA more accountable. I am not sure I agree
    with the framing that it is creating a new regulator. It is
    leveraging the benefits of an existing regulatory body to
    expand and to address an important investor protection concern,
    and that is inadequate frequency of IA exams.
        Mr. Neugebauer. Mr. Currey?
        Mr. Currey. Thank you.
        From our standpoint--I am a practitioner. I am a guy who
    sees people on a day-to-day basis and does this kind of
    business on the street. And so from my members' perspective and
    my perspective, we don't get up every day looking for a new
    cupful of regulations from our neighbors. We feel like we have
    a gracious plenty of regulation now and then some in most
    cases.
        The thing we want to avoid, though, for our members, is
    being subject to two regulators. And so, we would like to see
    this combined into one regulatory body with maybe two sets of
    rules that they can coordinate so that we can consolidate those
    examination processes and keep the costs to our members and
    their clients down to a bare minimum. So I think that speaks to
    FINRA as the choice for us.
        Mr. Neugebauer. Thank you.
        Mr. Helck. Yes, sir, I would agree with that. We are not
    looking for more regulators either; we are looking for
    consistency among all providers of the same services. And if
    one of the choices is to create a new regulator, then that
    would be problematic. If we have one regulator that can
    consistently apply the same high standards, I think we have
    accomplished what we came here to do.
        Mr. Neugebauer. Mr. Ketchum?
        Mr. Ketchum. I am just reiterating what has been said.
    FINRA provides oversight with respect to broker-dealer members
    that are either part of the same corporation or affiliated with
    87 percent of the human beings who are registered as investment
    advisers. We can provide that service effectively at their
    cost, and I agree with you, we should do that in a way that
    does not inappropriately expand regulation.
        Mr. Neugebauer. Mr. Morgan?
        Mr. Morgan. Congressman, that is exactly the point NASAA is
    making. You are creating a new regulator for the States that
    are doing the job, and we need to be excluded from this.
        Mr. Neugebauer. Mr. Tittsworth?
        Mr. Tittsworth. I agree that creating a new regulator is
    unnecessary. I don't have an answer, Congressman, for how you
    hold regulators accountable, and I understand your frustration
    with that.
        Mr. Neugebauer. I thank the chairman, and I would note that
    I finished on time, too.
        Chairman Bachus. We have an Oversight Subcommittee that is
    holding them accountable, I think, every day, and doing a good
    job.
        Mr. Hinojosa?
        Mr. Hinojosa. Thank you, Chairman Bachus.
        As I said in my opening remarks, I am concerned about the
    effects of this legislation on the smallest advisers. These are
    small businesses that serve the middle class with investments
    of, let us say, $500,000 or less, and we need to ensure that
    additional fees do not put them out of business.
        My first question is to Mr. Tittsworth. Will State-
    registered investment advisers be subject to the same
    membership fees even if they are already registered and
    examined by their States?
        Mr. Tittsworth. Yes, sir. As we read H.R. 4624, all State-
    registered advisers would have to belong to an SRO.
        Mr. Hinojosa. My next question would be to John Morgan, the
    securities commissioner of Texas. What sort of pros and cons
    does this legislation hold for the advisers who are working
    with large investors of $750,000 or more?
        Mr. Morgan. The jurisdiction has been divided $100 million
    or less assets under management or subject to State regulation,
    and are regulated in Texas by the State Securities Board.
        Mr. Hinojosa. So if it is $1 million or more that they are
    advising, could they do a better job by passing this
    legislation?
        Mr. Morgan. No, not with respect to the regulation by Texas
    and the vast majority of other States that are already doing
    the job. What is being proposed is a duplicate layer of
    regulation, and the fees, the membership fees, are just part of
    the cost. The ongoing compliance costs would be substantial as
    well.
        Mr. Hinojosa. I have to agree with you, and I think that
    this legislation is not necessary, and I believe that we ought
    to take a look at the SEC and maybe strengthen their position
    to oversee them.
        So with that, I yield back, Mr. Chairman.
        Mr. McHenry [presiding]. We will now go to Mr. Posey for 5
    minutes.
        Mr. Posey. Thank you very much, Mr. Chairman. And I
    compliment Chairman Bachus and Ms. McCarthy on their good
    intentions to protect investors. I assume that the advisers
    mostly fear overregulation by the Consumer Financial Protection
    Bureau, and this is maybe a step that might insulate you a
    little bit from that. I don't think it will do that. I think
    you will just have two people overregulating you rather than
    one.
        But I don't believe shifting an unfunded mandate, a burden
    onto the States, is a correct answer. More laws, rules,
    regulations, more employees and more costs is not going to
    solve the problem, as we have seen evidenced by Madoff's caper,
    for example. Madoff's caper was not caused by any lack of laws,
    rules or Federal employees; it was caused by a lack of
    employees who were willing to do their jobs. We had 20-
    something examiners and 30-something investigators, or vice
    versa, whatever the numbers are, who just failed to do their
    jobs. I don't know what they are doing now, but they are the
    ones who empowered Madoff, not a lack of laws.
        It appears that the SEC, who is empowered to oversee
    interstate regulation of securities and things, does not want
    to do their work and sees this as a great opportunity to shift
    burden onto the States, an unfunded burden, I might add, which
    is not the responsibility of the States, ostensibly because the
    SEC has too much work to do and can't afford to do anything
    else.
        But we know they have 1,200 lawyers at the SEC, who file an
    average of one case a year. I know a lot of lawyers who would
    like to have a heavy caseload like that. We know they
    squandered millions and millions of dollars on unused office
    space. And so, the question that begs for an answer is not how
    much money they waste or how much money they spend, but what do
    they actually do?
        We know how much money they spend. Certainly, that is not a
    measure of quality or performance. What do they actually do to
    protect the public, which is their number one job, and not
    employees who don't do their job?
        Mr. Chairman, to put this in the proper perspective, and if
    there are no objections, I would like to ask the SEC to tell us
    what they do. I would like the SEC to give us a one-page
    summary, and at the top of the page, I would like the SEC to
    state all the money that came through the SEC--reversions,
    credits, budget items, fees collected, penalties--and then I
    would like them to list on one page what they actually do, and
    how many times they do it, and then the cost of doing each
    function each time, and those lists of things should add up to
    the total amount of money that runs through the agency.
        And then, Mr. Chairman, when I see what the SEC actually
    does and what it actually costs to do what they say they
    actually do, I think we will be put in a whole lot better
    position to determine how we are going to move forward with
    allocating resources for enforcement. But I don't think at this
    time we should waste a whole lot of time, and a whole lot of
    energy, or a whole lot of taxpayers' money trying to invent a
    wheel, particularly a wheel that is already broken.
        I yield back, Mr. Chairman.
        Mr. McHenry. I thank you, and I will now recognize Ms.
    McCarthy for 5 minutes.
        Mrs. McCarthy of New York. I just want to ask you a quick
    question. Does your organization have in place a compliance
    database accessibility and searchable by an investor that
    includes the State-by-State information on registered
    investment advisers, the examination process, and the
    disciplinary action that has been taken on the individuals in
    the firms?
        Mr. Morgan. We have access to the CRB database that has
    information and the IARD database that has information.
        Mrs. McCarthy of New York. So that is for all the States?
        Mr. Morgan. Correct.
        Mrs. McCarthy of New York. Has that been updated recently?
        Mr. Morgan. Yes.
        Mrs. McCarthy of New York. Because I know about 2 years ago
    or 3 years ago, we had asked for that information, and you
    didn't have it.
        Okay. Mr. Tittsworth, what is the examination frequency of
    your members who are subject to SEC regulation and oversight?
    And has there been an increase or decrease in examinations
    since the financial crisis?
        Mr. Tittsworth. I do not know, Congresswoman, other than
    the statistics that have been thrown around here today, 8
    percent of all SEC-registered advisers in 2011, representing 30
    percent of the total assets under management.
        Mrs. McCarthy of New York. Could you send that to me in
    written form, then, when have you that information?
        Mr. Tittsworth. Sure.
        Mrs. McCarthy of New York. Thank you.
        And one more. Mr. Ketchum, there have been criticisms of
    the SROs' role in coordination with State authority for those
    States that satisfies the examination requirements under the
    bill. Can you explain again what you would anticipate the role
    of the SRO to be, and how the coordination will be achieved
    with individual State authorities when necessary?
        Mr. Ketchum. Thank you, Congresswoman.
        First, let me say that since I became CEO of FINRA some 3
    years ago, I have made it a major priority to include the
    coordination and common working efforts with respect to NASAA.
    As an example, this year there have been 103 access requests
    made to us on our existing self-regulatory side from the
    States. We have provided information back on all 103 access
    requests.
        We have tried to take as aggressive as possible an
    interpretation and reading with respect to concerns we
    previously had with respect to what is referred to as the State
    actor position. I will note that this legislation specifically
    addresses and provides far greater comfort on the
    appropriateness of interaction between the SRO and the
    provision of data and consultation than exists on the Exchange
    Act side, and I am delighted to see that.
        I would finally note that with respect to the annual
    meetings that occur that are built into the legislation, we
    view this just as we have always viewed the SEC's annual 19(d)
    meetings on the broker-dealer side as purely collegial and an
    opportunity to share information. To the extent there are any
    concerns the States have with respect to our role, we would
    certainly be glad to work with them with respect to clarifying
    that in the legislation.
        Mrs. McCarthy of New York. Thank you.
        Mr. Helck, one criticism we have heard a number of times
    today, and also before today, is the potential for regulatory
    arbitrage of the examination process as a result of the
    enhanced oversight and examinations by an SRO. You had
    mentioned a few things, but what are your thoughts on that, and
    what suggestions do you have that would further enhance the
    cooperation between the SEC and the SRO beyond what is
    currently in the bill?
        Mr. Helck. I thought your first question was very
    insightful, and it goes right to that very point. The CRD,
    which FINRA administers, is a record of all registered persons
    in the securities world, and it contains their licensing, their
    disciplinary history, and all the relative data. It is publicly
    available. And therefore, it gives the public the ability to
    monitor and have transparency into the records of their
    adviser.
        There is no similar kind of infrastructure in place for the
    people involved in the registered investment advisory world, so
    therefore, it goes to the differences and therefore
    inconsistencies of being able to establish and track at the
    same level. I think it would be useful for us to have
    consistent records on participants providing services across
    the industry and all the various regulatory regimes that they
    are operating.
        Mrs. McCarthy of New York. I agree. With that, I yield back
    the balance of my time.
        Mr. McHenry. I thank the gentlelady for yielding back. Mr.
    Luetkemeyer for 5 minutes.
        Mr. Luetkemeyer. Thank you, Mr. Chairman. I thank the
    gentlemen for being here this morning. I have some questions
    here that keep coming to my mind as I listen to Mr. Neugebauer,
    and Mr. Posey, in particular. Can you give me an explanation on
    what you feel over the last 4 years has been the problem with
    your industry? We have had some scandals and some scams. Was it
    due to the lack of proper rules to protect the consumer? Was it
    due to the lack of enforcement of existing rules? Or was it
    just the inadequacy and the failings of the regulatory
    officials to catch those things and do due diligence? Mr.
    Brown, can we go down the line here, I just would like to know
    what your thoughts are on it?
        Mr. Brown. I think my members would say the biggest single
    challenge they faced in the last 4 years as a result of the
    financial crisis, as a result of Mr. Madoff's crimes, and Mr.
    Sanford's crimes, is the undermining of trust. The crimes of a
    few have painted all legitimate industry participants with the
    same broad brush and it undermined trust between client and the
    adviser.
        Mr. Luetkemeyer. Okay. The crimes have been committed.
    However, what is the problem there? Was it they just had some
    folks who just are going to go out and do some mischievous
    things here and got away with it and the reason they did was
    because we didn't have the rules in place to protect the people
    or the enforcement of existing rules wasn't there just or the
    regulators just dropped the ball?
        Mr. Brown. I think it is more the latter.
        Mr. Luetkemeyer. The regulators dropped the ball. Mr.
    Currey?
        Mr. Currey. I have to caution you that I am a big-picture
    guy, so if you get too detailed here, we are going to be in
    trouble. I would say it is a combination of both. Probably,
    there were some regulations that needed to be different, if not
    additional regulation. But greater than that, enforcement is
    always a problem. It is the most expensive end of the thing and
    probably that is where a good deal of the blame lies.
        Mr. Luetkemeyer. So you believe the enforcement end was the
    problem here?
        Mr. Currey. Yes.
        Mr. Luetkemeyer. Mr. Helck?
        Mr. Helck. I would agree with that. We have good rules and
    laws on all sides of the industry. There are inconsistencies.
    So when we have failings of human beings to either be effective
    in doing their roles or we just have circumstances beyond
    anyone's control, what we look to are what is the structural
    framework that would have and could have and maybe in the
    future could be improved to make sure that it doesn't happen
    again, so we should learn from those mistakes. Consistency, I
    think we all have stated here today, is one of those strategies
    that would help us achieve that. And that is why we think that
    if we had a consistent policy, and therefore oversight and
    enforcement process, we would be less subject to things falling
    through the cracks as they don't interface well.
        Mr. Luetkemeyer. Mr. Ketchum?
        Mr. Ketchum. Congressman, no regulator can be happy with
    what has happened in the last 4 years. Any regulator that
    hasn't reviewed the way we approach examinations, enforcement,
    or investigations is deficient in not doing so. We have. We
    think we have made changes that are important. I also agree
    with you, speaking on the investment adviser side, that the
    basic rule and statutory environment is excellent. I don't
    believe that the need here is, in any way, primarily related to
    rule making. But as a last piece, if you don't examine and if
    you examine only 8 percent of persons, then have you to depend
    on nothing but enforcement. And that probably explains why the
    SEC has as recently as today talked about such a banner year in
    investment adviser enforcement actions.
        Mr. Luetkemeyer. Thank you. Mr. Morgan?
        Mr. Morgan. It is important to keep in perspective that
    this is a Federal problem, and all of the examples are Federal
    issues. And not doing the inspections on the cycle that makes
    sense or that is adequate, or following up on information that
    is provided, that you would expect it would follow up on an
    enforcement investigation. These aren't State problems; the
    States are doing their job.
        Mr. Luetkemeyer. Very good. Thank you. Mr. Tittsworth?
        Mr. Tittsworth. There is not a lack of regulations. There
    are plenty of laws prohibiting fraud. I don't know the answer
    to why people continue to commit fraud, Congressman.
        Mr. Luetkemeyer. My question is by not catching them, is it
    a problem with the rules, a problem with enforcement of the
    rules or is the problem that the regulators aren't catching
    anything and just being inadequate in their job?
        Mr. Tittsworth. I think the regulations are adequate; it is
    more a question of inspections and enforcement.
        Mr. Luetkemeyer. Okay. So there seems to be a consensus
    that the regulation is the problem. Does this bill solve the
    problem, yes or no?
        Mr. Brown. It is a tremendous step in the right direction.
        Mr. Luetkemeyer. Okay.
        Mr. Currey. As long as it increases and equalizes the
    examination process across both lines of the business, yes, it
    does.
        Mr. Luetkemeyer. Okay. Mr. Helck?
        Mr. Helck. A good step in the right direction, not far
    enough.
        Mr. Luetkemeyer. Okay. Mr. Ketchum?
        Mr. Ketchum. An environment of increased examinations
    directly addresses the problem.
        Mr. Luetkemeyer. Mr. Morgan?
        Mr. Morgan. Absolutely not. The States are not part of the
    problem.
        Mr. Luetkemeyer. Okay. Mr. Tittsworth?
        Mr. Tittsworth. I believe I have been clear. We oppose this
    bill and think there is a much better approach.
        Mr. Luetkemeyer. Thank you. I know this is a comment. I
    know I come from Missouri and we have, our own State does an
    excellent job of this. And I am not sure we need another layer
    there, but as a former regulator myself, I understand what you
    are talking about. And if we have a regulatory problem, we need
    to solve it somehow, some way and get together and make it all
    work. I thank you, Mr. Chairman, for the extra time.
        Mr. McHenry. Mr. Scott for 5 minutes.
        Mr. Scott. Thank you, sir. It is always good to know to
    keep score, and I just tried to keep score just now. I want to
    make sure I am right about this. Is the score on this among the
    6 of you, 4 to 2 in favor of the legislation, is that correct?
    All right. That is very good.
        Let me start with you, Mr. Currey. You represent a very
    fine organization, the National Association of Insurance and
    Financial Advisors. I think it is very important for us,
    particularly as you represent financial advisors, to really get
    your take on this. Tell us what you feel are the strong points
    about this bill, tell us where we might be able to improve it,
    and the concerns that were raised by those two who are opposed
    to that, how might that be addressed?
        Mr. Currey. I am sorry, the last part again, sir?
        Mr. Scott. This is a hearing. They have raised some
    concerns. I think you have heard the two who are opposed to
    this concern. Are they areas in which those can be addressed?
    But generally, what I want to know from you, because you
    represent the financial advisors, is what generally is your
    take on this? Are we going in the right direction, are we doing
    what needs to be done here to enhance what I feel is the most
    important thing: investor confidence? Is this solving the
    problem?
        Mr. Currey. We believe this would certainly go a few steps
    in that direction. We support the bill, of course. I guess we
    have just a couple of things. As I said earlier in response to
    Mr. Neugebauer, we didn't come looking for new regulation; we
    have plenty of that to go around. But there appears to be
    consensus or common agreement that there is a gap in
    regulation, particularly as it applies to the investment
    adviser world. And most of our folks, most of our members, are
    investment adviser representatives, that is, they work under a
    corporate RIA, which is subject already to SEC oversight and
    regulation.
        And so for us, to consolidate our regulator that we deal
    with into one entity is a very good thing, and we see the
    chance in this bill to do that. We think the appropriate choice
    in that matter is FINRA because they have already have a great
    regulatory chassis established, and we think they would get up
    to speed on the IAR side and the RIA side as well. Sure, there
    would be two different sets of rules, but you would have one
    regulator coordinating those rules and making sure that they
    got applied equitably across both lines of business.
        And the most important thing for our members is we would
    only have one regulator in our face at a time, and that really
    is important. Examinations could be consolidated. We believe
    there is a way to do that. These are two different lines of
    business, but they are not utterly dissimilar; they are alike
    in many ways. And we think those rules could be consolidated
    into a single examination.
        The other thing I would say, it is in the bill, of course,
    that asked for field representation. In other words, adviser
    representation on the governing board of any new SRO or
    governing board that is created. And I would suggest that maybe
    it would be a good idea for you guys to think of, too, Mr.
    Ketchum. We think that field experience, current field
    experience, knowing how it really goes when you are in
    somebody's living room or they are in your office, we think
    that is an important part of this.
        Mr. Scott. Okay. Thank you very much. Now, I think Mr.
    Morgan and Mr. Tittsworth, you guys were two of the two who
    oppose the bill, is that correct? Let me ask you, because one
    of the concerns that was raised by those who had some concerns
    about it was the impact on some of the smaller operators here.
    So let me ask you, because if this bill is enacted, it clearly
    states that those investment adviser firms with under $100
    million in assets would not be affected if they are not already
    covered by State regulations. So doesn't this sort of refute
    the argument that the expense is prohibitive and would be
    damaging to the operation of smaller investment adviser firms,
    as was pointed out, I think by one of you, and also by Mr.
    Hinojosa, who is opposed to it.
        Mr. Morgan. If I might go first, they absolutely would be
    affected. They would be required to join the SRO, pay the
    membership fee, and they would be subject to the ongoing
    compliance costs, whatever those are. And for the small firms
    that I have referred to, for example, there are many of these
    firms with $5 million to $10 million in assets under
    management, if you do the math on what they are bringing in,
    $50,000 to $125,000, it is a small amount of money and they
    have all of the costs that they have to run a business. And if
    you have adequate regulation in place, which we have in Texas
    and in the other States, it is absolutely an unnecessary layer
    of costs, not just initial costs, but the ongoing costs that
    they would have to comply with. It makes no sense.
        Mr. McHenry. The gentleman's time has expired. Mr. Canseco
    is recognized for 5 minutes.
        Mr. Canseco. Thank you, Mr. Chairman. Mr. Brown, the chart
    in your testimony shows that a lot of the growth in industry
    reps over the next several years will be dual registered reps,
    and that is registered both as broker and also as adviser. So
    how would this legislation make the examination regulation of
    dual registered reps more effective and efficient for everybody
    involved?
        Mr. Brown. Thank you for the question. Similar to what Mr.
    Helck has said, it would create a lot more consistency. Two
    things: One, it would create a lot more consistency to have one
    regulator looking at both sides of the business. It would also,
    as we have said over and over here, close the regulatory gap so
    that those nondual registered RIAs, those independent RIAs who
    are subject to virtually no oversight, they would finally have
    someone coming in and verifying that they are complying with
    the rules.
        Mr. Canseco. And ultimately, how would this benefit the
    client of a dual-registered rep?
        Mr. Brown. Clients want to know that they can trust the
    person they are getting advice from. And a key component of
    that trust, not the only component, but a key component of that
    trust, is knowing that adviser is subject to some ongoing
    oversight. So I think it would do that.
        Mr. Canseco. It would be good. Do you expect the growth in
    dual-registered reps to continue to grow over the next decade?
        Mr. Brown. Yes, sir.
        Mr. Canseco. And if so, would retail investors ultimately
    benefit from a streamlined regulatory regime that has less gaps
    than it does currently?
        Mr. Brown. Absolutely.
        Mr. Canseco. So Mr. Brown, we are potentially moving
    towards a scenario where the rules regarding broker-dealers and
    investment advisers could be harmonized. So what would be the
    outcome of the industry and investors if the regulatory
    oversight bodies are not harmonized as well?
        Mr. Brown. We have an opportunity to harmonize the rules
    because the business is now harmonized. The typical investment
    financial adviser who is affiliated both with a broker-dealer
    and is also registered as an RIA is delivering comprehensive
    advice, products, and services to the average middle-class
    investor. This is an opportunity to help the regulation and
    oversight catch up with that development in the marketplace.
        Mr. Canseco. So given that the broker-dealers are already
    examined much more often than investment advisers, does that
    constitute a serious inequity between these two professionals?
        Mr. Brown. Absolutely.
        Mr. Canseco. If Congress authorized the SEC funding at the
    level they recently requested, which would amount to a budget
    increase of about $250 million, a report showed they would
    still only be able to examine 11 percent of investment
    advisers, given that we are on the verge of a budget crisis
    that is increased. Isn't it possible--so what is the best way
    to examine advisers that currently are not being examined?
        Mr. Brown. In light of the fact that it is not likely for
    the SEC's budget to increase, this legislation allows the
    resources of the industry through FINRA to be leveraged in a
    most cost-effective manner to close the regulatory gap.
        Mr. Canseco. Thank you, Mr. Brown. So Mr. Ketchum, if FINRA
    were eventually approved by the SEC as the SRO for investment
    advisers, would you expect the fees for firms already examined
    by States to be minimal?
        Mr. Ketchum. Yes, we would.
        Mr. Canseco. Did the Boston Consulting Group talk to you or
    any FINRA staff before creating a cost estimate for what an SRO
    for investment advisers would cost?
        Mr. Ketchum. No, they did not, and their cost estimates are
    widely inflated.
        Mr. Canseco. All right. Mr. Morgan, do you disagree that
    the potential costs for State-registered advisers would be
    minimal?
        Mr. Morgan. Yes. I don't know what the costs are. I have
    heard various descriptions of what they might be. But you have,
    even if the membership costs, again, are low, the ongoing
    compliance costs could be significant. And again, with respect
    to the advisers in Texas, and I am sure this is true in a
    number of other States, small advisers, any cost, any added
    layer that you put on is going to be harmful and unnecessary.
        Mr. Canseco. Is there a way this bill could be improved to
    address the concerns you have as a State regulator?
        Mr. Morgan. By excluding the States from coverage that have
    a program in place to cover investment advisers.
        Mr. Canseco. And would you include in that, those that have
    a certain quality or level of mandates or matrix?
        Mr. Morgan. I think there would have to be a study done to
    determine whether or not that was even appropriate. I think the
    starting point should be that they should be excluded.
        Mr. Canseco. Thank you very much, Mr. Morgan. I yield back.
        Chairman Bachus. Mr. Green?
        Mr. Green. Thank you, Mr. Chairman, for holding this
    hearing. I do believe that it is exceedingly important, and I
    thank all the witnesses for appearing. I especially thank the
    Texan for appearing today. We are honored to have you, sir.
    Thank you very much. All of the Texans. Let me just check. We
    may have some Texans who don't acknowledge it on paper. Do we
    have any other Texans? How many Texans? Raise your hand if you
    are a Texan. All the Texans in the house. Thank you. I really
    opened the door to something, Mr. Chairman.
        Permit me to do this, because I think that sometimes what
    appears to be a disagreement is an agreement that we just can't
    quite agree on. It is a rather nebulous way of speaking, I
    know. But I think that we have three possible solutions that
    have been recommended to us, if I may just capsulize them: one,
    to use the SEC; two, to work with SROs, one or more; and three,
    to do more with FINRA. We have these three possibilities. But I
    am curious, do we all agree that as I speak right now, some
    person is, in a dastardly way, trying to defraud someone, and
    that that person ought to be caught? My suspicion is that as I
    am speaking, someone is trying to perpetrate a dastardly deed.
        Now, if you differ with me, kindly raise your hand. Okay.
    The absence of hands up, Madam Reporter, would seem to indicate
    that people agree with me. It is nice to have so many people
    agree with me. It is a rare thing. But now if we know that we
    have these persons who are trying to perpetrate these dastardly
    deeds, I assume that we all agree that we should be able to
    prosecute, we should be able to capture and prosecute them. And
    if you don't agree, or if you think there is another way to do
    this without catching them, and maybe there is a way to prevent
    them from doing things, and I would like to see this done, but
    I think we all agree that somebody is going to slip through the
    nets probably notwithstanding regulation.
        We do all that we can to prevent things, but we still have
    cops on the beat so that we can capture those that will, not
    withstanding the best of intentions, slip through the nets. So
    does everybody agree that somebody is going to slip through the
    nets?
        Okay. Now, but we do agree, I think also, that there ought
    to be some way by which we can prevent, but also capture,
    prevent and capture people who do these things. So if this is
    the case, then the question really becomes, what is the best
    methodology for doing what we know has to be done?
        So, I have given you three possibilities. What I would like
    to do is start with Mr. Brown. And Mr. Brown, rather than go
    through a long dissertation, if you don't mind, just tell me,
    do you think that we should use the SEC methodology, the FINRA,
    or should we go with an SRO? Where are you on it, or some
    combination?
        Mr. Brown. We think that an SRO should be designated to
    take on this responsibility, and we think FINRA is in the best
    position to take on that role.
        Mr. Green. So you are SRO and FINRA?
        Mr. Brown. Yes, sir.
        Mr. Green. Okay. That is good to know. All right. Let's go
    to the next gentleman, please.
        Mr. Currey. Thank you, Mr. Green. Even if the examination
    frequency could be stepped up with the SEC, I would say that
    our members would experience that as two regulators, and that
    is what we don't want. We want to deal with one regulator. So
    we support an SRO and FINRA as an SRO.
        Mr. Green. So the two of you are in the same place?
        Mr. Currey. Yes.
        Mr. Green. Okay. SRO and FINRA. Thank you very much. The
    next person, please?
        Mr. Helck. Yes. SIFMA believes that we should have
    consistent oversight and supervision, that an SRO is best
    prepared to do that, and this bill goes only part of the
    distance in determining exactly who that should be, I think
    that should be part of the ongoing process, to evaluate and
    discuss with FINRA and other alternatives there capabilities
    and make that decision when we are prepared to do that, but not
    the SEC, an SRO.
        Mr. Green. So you are SRO?
        Mr. Helck. Yes.
        Mr. Green. Okay. Yes, sir?
        Mr. Ketchum. H.R. 4624 has it right. There should be
    provision for one or more SROs, whether or not that SRO is
    FINRA.
        Mr. Green. SRO. Yes, sir?
        Mr. Morgan. First, it is a Federal question; the States are
    doing their job. And with respect to the Federal question, we
    think that user fees are appropriate and that the SEC is the
    appropriate agency to handle that.
        Mr. Green. SEC?
        Mr. Morgan. Yes.
        Mr. Green. Okay.
        Mr. Tittsworth. The SEC would be the most effective and
    most efficient way to deal with this issue.
        Mr. Green. All right. As you can see, my time has expired.
    I do appreciate, Mr. Chairman, your giving me the opportunity
    to ask these questions. And the 4 seconds I have gone over, I
    will give to you at another time. Thank you.
        Chairman Bachus. Thank you. You actually were more diligent
    with your time than anyone else on the committee.
        Mr. Green. Thank you, Mr. Chairman.
        Chairman Bachus. Mr. McHenry? And thank you for chairing
    the hearing.
        Mr. McHenry. Thank you, Mr. Chairman. Mr. Tittsworth, you
    say in your testimony, because of the exemptions within this
    bill for large advisers, small advisers are singled out for
    additional regulations and costs, okay. So I want to understand
    this. Small advisers, do they have--are their clients of more
    modest income than large advisers?
        Mr. Tittsworth. Sometimes, yes, sir.
        Mr. McHenry. Is that often or sometimes?
        Mr. Tittsworth. Sometimes. Advisers come in all shapes and
    sizes, Congressman.
        Mr. McHenry. But we are talking about the large advisers
    versus the small advisers.
        Mr. Tittsworth. Understood. And actually, characterizations
    of the differences between larger and smaller advisers is a
    generality as well. As you may know, in H.R. 4624, the
    exemptions are structured so you would be exempt from the SRO
    requirements if you have any mutual fund clients or if you meet
    the 90 percent test, which gets more complicated.
        As a general matter, the larger investment advisers would
    tend to be exempt from the SRO requirements, and as a general
    matter, smaller firms would be covered.
        Mr. McHenry. Right. I recognize that in my asking you the
    question. So you just confirmed to me what I knew going in. I
    will just move on, because the point I am trying to make is
    that if you have folks of more modest income, would this
    legislation inhibit or restrict their ability to get the
    services that they currently have?
        Mr. Tittsworth. I understand the question, I believe. I
    think that, as I testified, this bill could create
    opportunities for regulatory arbitrage. And one possibility is
    that an investment adviser, a larger investment adviser, might
    shed smaller, less profitable clients in order to meet the 90
    percent test for SRO exemption in the bill.
        Mr. McHenry. So in your view, those folks of modest incomes
    with modest investments could be adversely affected, or in your
    view, would be adversely affected?
        Mr. Tittsworth. It is possible, yes, sir.
        Mr. McHenry. It is possible. Okay. And to that point, Mr.
    Helck, there is the distinction between broker-dealers and
    investment advisers. They have two different regulatory
    structures currently. Do most investors even know the
    distinction between a broker-dealer and investment adviser?
        Mr. Helck. The SEC's RAND study done a couple of years ago
    confirmed the fact that the public really doesn't understand
    this, and I would offer, can't be expected nor should they have
    to understand this to receive the same and consistent
    protections.
        Mr. McHenry. Okay. So as a follow-up to that, because the
    public doesn't really know the difference between a broker-
    dealer and an investment adviser, do they understand the
    distinction between their regulatory structures?
        Mr. Helck. Not at all.
        Mr. McHenry. Not at all. So to Mr. Tittsworth's point about
    regulatory arbitrage, is that real, is that serious?
        Mr. Helck. I would argue that we have regulatory arbitrage
    today. That is part of the problem we are trying to address
    here. To have consistent policy and oversight across all
    providers of individual services would clarify for the public
    and remove the need to understand the differences between
    various structures and provide consistent protection.
        Mr. McHenry. Okay. So in your view, broker-dealers have
    greater oversight today than investment advisers?
        Mr. Helck. In today's world, firms like ours and Mr.
    Currey's and most other providers are governed by all of the
    above. We are a registered investment adviser, we are a broker-
    dealer, we have all 50 States, and we have the SEC and FINRA,
    and so therefore, we are dealing with all of the above. It is
    those who are escaping portions of that where the
    inconsistencies lie, and that is where we need to make the
    level playing field.
        Mr. McHenry. Mr. Ketchum, Mr. Tittsworth, in his testimony,
    contends that if an investment adviser SRO were mandated, the
    resulting new oversight responsibilities would require the SEC
    to expend significant additional resources. Do you agree with
    that?
        Mr. Ketchum. I don't agree with ``significant.'' Yes, the
    SEC would have additional oversight responsibilities. They
    already have them over us as an organization, our exam program.
    They would have to add to it. I think that would be a small
    fraction of the cost of them doing the program themselves.
        Mr. McHenry. All right. Mr. Tittsworth, do you want to
    respond?
        Mr. Tittsworth. I think that people don't appreciate right
    now how much the SEC spends on broker-dealer oversight in
    addition to FINRA. I believe the Section 914 report--and I
    would be happy to check on it--states that the SEC has 380
    examiners on the broker-dealer side plus an additional 40 or 50
    to oversee FINRA and other SROs. And the Boston Consulting
    Group and others, including the GAO last week, have said that
    the SEC doesn't do an adequate job of overseeing FINRA now.
        Mr. McHenry. Thank you, Mr. Chairman. And thank you for
    holding this hearing on this important piece of legislation.
        Chairman Bachus. I appreciate that, Mr. McHenry. I want to
    commend you on your oversight work on this committee and also
    on government oversight. You have done some important,
    meaningful work. With that, we have a unanimous consent request
    to introduce the statement of the Investment Company Institute
    in support of this legislation.
        I appreciate the Members. I think this was an interesting
    discussion and will serve us in good stead as we move forward
    in trying to come up with a solution that is beneficial to the
    American investing public, and also those who serve them as
    investment advisers and broker-dealers. So, thank you.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for Members to submit written questions to these
    witnesses and to place their responses in the record.
        This hearing is now adjourned.
        [Whereupon, at 12:26 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                  June 6, 2012

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