• Re: Possible SRO for Investment Advisers and Fiduciary Standard for Broker-Dealers - What Others Are Saying
  • July 3, 2013 | Authors: Michael G. Dana; Peter D. Fetzer; Terry D. Nelson
  • Law Firms: Foley & Lardner LLP - Miami Office ; Foley & Lardner LLP - Milwaukee Office ; Foley & Lardner LLP - Madison Office
  • In the ongoing debate over whether a supervisory regulatory agency, other than the SEC, should be delegated the task of examining and otherwise regulating registered investment advisers, the Investment Adviser Association (IAA) has recently made its position on the subject known to the SEC’s new chair, Mary Jo White. The IAA is a nonprofit association that exclusively represents the interests of its members, who represent 500 registered investment advisers with about $9 trillion in assets under management.

    In a recent meeting on June 17, 2013 with Chairman White and certain staff members of the SEC, representatives of the IAA expressed their support for the “user fee” method (i.e., charging each registrant an annual fee) of raising sufficient funds for the SEC to employ additional staff and resources to be able to examine registered investment advisers at a pace mandated by U.S. Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It is widely thought that it may take an additional 2,500 examiners to adequately police SEC-registered investment advisers. Currently, there are reportedly only 400 SEC examiners who examine annually about eight percent of the approximate 11,000 SEC registrants.

    In Chairman White’s testimony on June 25, 2013 to the U.S. Senate’s Subcommittee on Financial Services and General Government Committee of Appropriations in support of President Obama’s 2014 fiscal year budget request, she stated that the budget request, if fully funded, would add approximately 672 new staff positions. In her testimony, Chairman White stated that more than 40 percent of registered investment advisers have never been examined and that the number of registered investment advisers has increased by more than 40 percent during the past decade and assets under management by such advisers have increased more than two-fold, to more than $50 trillion. However, only 250 additional examiners could be added to the SEC’s investment adviser examination program even if the budget request was totally funded. That number of new examiners is roughly 10 percent of the number of examiners believed to be necessary in order for the SEC to examine roughly the same percentage of registrants as currently examined by FINRA of registered broker-dealers.

    Those who support the user fee model (as the IAA does) do so in large degree because they believe that FINRA would be the likely “SRO” entity to step up to that role if that model would be employed to examine and regulate investment advisers. The user fee model would leave the SEC in place as the examining body and would avoid duplicate regulation that may be one of the results of using a separate entity as an SRO, such as FINRA.

    In a separate letter to Chairman White dated June 4, 2013, the IAA made known its position on the recent Request for Information (RFI) release by the SEC regarding the possible extension of a fiduciary duty to broker-dealers. The SEC has recommended in a study on the subject mandated under Dodd-Frank to adopt parallel rules under both the Advisers Act and the Securities Exchange Act of 1934 laying out the fiduciary duty that is the same for both investment advisers and broker-dealers, respectively. While the IAA supports the SEC’s recommendation, the organization made it known to Chairman White that it believes the fiduciary standard adopted by the SEC for broker-dealers should be “no less stringent than the existing standard under the Advisers Act.” The IAA also noted that the RFI fails to emphasize the fiduciary standards necessary to make it a level playing ground for broker-dealers and investment advisers. The IAA voiced its concerns that if the RFI is closely followed by responders, the fiduciary standard eventually adopted will be nothing more than a standard comparable to the existing suitability “know your customer” test for registered broker-dealers. The chief concern among some members of the IAA is that a weakened version of the fiduciary standard for broker-dealers would, over time, serve to water down the fiduciary standard for investment advisers, and their clients would be the victims as a result.