SEC plan could cost managers

WASHINGTON — The SEC is hatching a plan that could subject money managers to an expensive new layer of regulatory oversight.

Instead of just the Securities and Exchange Commission looking over their shoulders, managers could be regulated by a self-regulatory organization, or SRO, said David Tittsworth, executive director of the Investment Adviser Association, a Washington trade group.

Mr. Tittsworth believes the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers Inc.), which already regulates broker-dealers, will be the SRO of choice. In fact, he said FINRA executives have been working behind the scenes to get SEC staffers behind the proposal.

“FINRA is licking its chops over the possibility of becoming the SRO for investment advisers.” Mr. Tittsworth said at a recent conference in Washington sponsored by the IAA and IA Week, a trade publication.

SEC Chairman Christopher Cox, believing that regulations governing investment advisers and broker-dealers need a facelift, assigned an agency task force to recommend options to him by May 5.

“It’s certainly an option this SEC task force is actively considering,” Mr. Tittsworth said. “We’re taking this all very seriously.”

Members of Mr. Tittsworth’s organization vehemently oppose that proposal. “The SEC has done a very good job regulating advisers,” said Henry H. Hopkins, IAA chairman and general counsel of T. Rowe Price Associates Inc., Baltimore. “If it’s not broken, don’t fix it.”

John Heine, SEC spokesman, said officials there would not comment on the matter.

Herb Perone, a FINRA spokesman, said, “FINRA is not going to engage in an unproductive back and forth with people whose paranoia has trumped their common sense.” But he would neither confirm nor deny that the organization is lobbying to be the SRO for money managers.

Stephanie Monaco, a former SEC investment division branch chief who is now a partner at Mayer Brown LLP, Washington, said SEC officials have kicked around for at least a decade the idea of subjecting money managers to oversight by a self-regulatory body. She said it makes sense from a regulator’s point of view in promoting efficiencies.

“As these two independent lines of business (money management and brokerage services) start to merge, I think it’s a logical question to ponder whether an SRO created in part to oversee the activities of one ought to oversee the activities of the other,” Ms. Monaco said.

Ms. Monaco also said that, even if the task force recommends and SEC officials decide on SRO regulation for money managers, it will take an act of Congress to make SRO regulation of money managers a reality.

“The main question to the SEC is how do you regulate logically two kinds of financial professionals when there is joining of some of their activities right smack in the middle?” Ms. Monaco said.

The line separating broker-dealers and money managers has been blurring because broker-dealers have been offering more investment advisory services over the years.)

The Securities Industry and Financial Markets Association, the trade group for broker-dealers in Washington, has no position on the proposal to subject money managers to SRO regulation, according to spokesman Travis Larson. Sources said SIFMA has not taken a position because some of its members are pure asset managers and do not support the proposal.

The mutual fund industry’s Investment Company Institute, Washington, also has taken no position on the proposal, spokesman Ed Giltenan said. He wouldn’t say why.

Mr. Tittsworth said he believes it’s important for money managers to start fighting SRO regulation now, before the concept gains momentum.

“We have got to begin the process of educating members of Congress, who will ultimately be responsible for this happening or not happening,” Mr. Tittsworth said. “We have to begin talking about this process now.”

Among his concerns: SRO regulation would add an additional layer of expense to the money management business.

According to FINRA’s web site, member firms pay annual dues on a tiered scale based on the firm’s size. Dues start at $1,200 for firms with annual gross revenues of $1 million or less. Firms with annual revenues of $25 million to $50 million pay 26 basis points on their annual gross revenues, so a firm with $50 million in revenue would pay $130,000. Those with annual revenues of more than more than $25 billion pay 8.5 basis points.

“Membership is compulsory,” said FINRA’s Mr. Perone. “If your firm is doing securities business in the U.S., you must by federal statute register with FINRA, and you’re subject to FINRA rules, FINRA examinations and FINRA discipline.”

“The whole point is that the industry pays for the cost of self-regulation,” Mr. Perone added. “The taxpayer does not pay for the cost of regulation.”

The FINRA, according to Mr. Perone, had operating expenses of $600 million in 2006. According to the FINRA web site, the organization has about 3,000 employees and oversees about 5,000 brokerage firms, 172,000 branch offices and 676,000 securities representatives.

By contrast, the SEC’s Office of Compliance Inspections and Examinations has about 450 full-time employees to examine about 11,000 SEC-registered investment advisers, according to the SEC’s budget documents.

One source noted there are about 550 mainly larger firms that are registered both as money managers and brokerages and thus are already subject to FINRA oversight.

“Dual registrants wouldn’t mind it (if money managers are subjected to SRO regulation) because they’re already subject to FINRA regulation,” the source said.

Contact Doug Halonen at [email protected]