[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
H.R. 4624, THE INVESTMENT ADVISER
OVERSIGHT ACT OF 2012
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HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
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JUNE 6, 2012
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Printed for the use of the Committee on Financial Services
Serial No. 112-132
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76-103 WASHINGTON : 2013
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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
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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
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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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