Financial Services Committee Proposes Investment Adviser SROs

April 26, 2012 Comments Off on Financial Services Committee Proposes Investment Adviser SROs

Rep. Spencer Bachus (R-AL), Chair of the House Financial Services Committee, and Rep. Carolyn McCarthy (D-NY) introduced legislation–the Investment Adviser Oversight Act of 2012–that would create new self-regulatory organizations intended to provide more efficient and effective oversight of the retail investment advisory industry.

The bill would create one or more National Investment Adviser Associations (NIAAs). NIAAs would themselves be registered with and overseen by the Securities and Exchange Commission. SEC-registered investment advisers with retail customers would need to become members of an NIAA in addition to registering under the Investment Advisers Act.

Two significant carve outs are contained in the draft bill. First, state-registered investment advisers (i.e., those with less than $100 million AUM) would remain under state authority provided their state conducts periodic on-site examinations. Second, advisers with at least 90% of their AUM attributable to “private funds” would be exempt from NIAA membership. Private fund here presumably means 3(c)(1) or 3(c)(7) funds exempt from Investment Company Act registration.

Chairman Bachus stated that the need for the legislation was based on findings of an SEC study required by the Dodd-Frank Act. That study found that only 8% of registered investment advisers were examined by the SEC in 2011 compared to 58% of broker-dealers. According to Bachus, “Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change.”

Post Dodd-Frank, the SEC has had markedly increased regulatory burdens and difficulty in getting expanded budgetary requests approved. No doubt it has lacked the resources to effectively examine the growing number of registered advisers with its desired frequency. One wonders whether creation of entirely new agencies (funded by members’ fees) is truly the most effective remedy. Should the proposed bill become law, investment advisers can anticipate another layer of regulatory filings and associated fees. It remains to be seen whether the bill will gain traction.



Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.


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