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



 
                   H.R. 4624, THE INVESTMENT ADVISER

                         OVERSIGHT ACT OF 2012

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               ----------                              

                              JUNE 6, 2012

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-132





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

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

           James H. Clinger, Staff Director and Chief Counsel


                            C O N T E N T S

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

                               WITNESSES
                        Wednesday, June 6, 2012

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

                                APPENDIX

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

              Additional Material Submitted for the Record

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


                   H.R. 4624, THE INVESTMENT ADVISER


                         OVERSIGHT ACT OF 2012

                              ----------                              


                        Wednesday, June 6, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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


                            A P P E N D I X



                              June 6, 2012

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