This past week, the House Financial Services Committee conducted hearings regarding the oversight of registered investment advisers, as well as the SEC’s recommendation of a uniform fiduciary duty standard for investment advisers and broker-dealers. The SEC, however, did not receive many accolades at the hearings. Instead, the SEC received significant criticism for its failure to uncover the Madoff and Sandford Ponzi schemes, despite a budget that has increased significantly in the past few years.
In some of the more compelling testimony, SEC Chairman Schapiro acknowledged that the SEC can only examine 9% of the nearly 12,000 registered advisers on a yearly basis. Schapiro conceded that such scant oversight is unacceptable considering the fact that investment advisers manage nearly $43 trillion in assets. This failure has resulted in the outcry for greater oversight so that the world can avoid another Madoff.
This call has resulted in the debate over who will oversee investment advisers going forward. The SEC has asked for more funding to conduct this task. This request has been met with, at best, tepid support. If the SEC could not detect Madoff and Sandford despite its billion plus annual budget, the critics suggest pouring more money on a failed venture is not the way to go.
Others have called for the formation of a new self-regulatory organization separate and apart from the SEC. Issues with the creation of such an entity focus on funding and structure, among others. The Financial Industry Regulatory Authority (“FINRA”) has called for Congress to vest it with oversight similar to the oversight it has for broker-dealers. Opponents of such a proposition point out that investment advisers are subject to a fiduciary duty standard of care, where broker-dealers are only subject to a suitability standard. As such, the critics claims that FINRA lacks the institutional capital to handle this oversight. Moreover, the critics claim that giving FINRA this authority will drag it away from its mission of broker-dealer oversight.
The question remains, will anything come about from these hearings or will there be more debate with nothing to show for it. Although I foresee additional meandering debate, I believe that investment advisers will have a new regulator, at least in principle, by the end of the year. From what I have seen of these debates, the logical approach will be a middle ground; FINRA will be asked to create a separate division for investment adviser oversight. This way, FINRA can have one arm completely focused on broker-dealers and, at the same time, have another arm completely focused on investment advisers. Both arms will report to the SEC. Although structure and funding would have to be resolved, this middle approach seems the most likely to be sold to Congress. Whatever the ultimate approach, it is beyond dispute that investment advisers will be subject to oversight unlike that they have experienced in the past and they better be prepared for it.