Money managers are fighting legislation that would — for the first time — subject the roughly 4,000 firms associated with broker-dealers to regulation by the Financial Industry Regulatory Authority.
The FINRA provision is part of the Investor Protection Act, approved Nov. 4 by the House Financial Services Committee. The bill includes a variety of other legislative changes that would dramatically enhance government oversight of money managers.
A draft bill introduced by Senate Banking Committee Chairman Christopher Dodd, D-Conn., on Nov. 10, on the other hand, would not subject money managers associated with broker-dealers to FINRA regulation.
Other key provisions in the legislative measures:
• The House bill, expected to be voted on the floor as soon as the first week of December, would require money managers registered with the Securities and Exchange Commission to start paying user fees; the Senate draft would instead enable the SEC to help fund its operations through fees assessed on stock and bond transactions.
• A separate House bill and the Senate draft would require managers of large hedge funds to register at the SEC. Unlike the Senate proposal, the House bill would also require managers of large private equity firms to register.
• Both the House bill and the Senate proposal would shift 4,200 of the about 11,000 SEC-registered money managers — that is, those managers with less than $100 million under management — to state regulation. Under current SEC regulations, money managers with more than $25 million in assets are required to register with the agency.
“The bottom line message for money managers is that they should expect increased regulation and greater scrutiny no matter what happens with the bill,” said David Tittsworth, executive director of the Investment Adviser Association, a lobbying group for money managers in Washington.
But managers are particularly concerned about the prospect for FINRA regulation.
“We recognize (the FINRA provision) is well intentioned, but we are concerned that it would create an uneven playing field for investment advisers by applying different regulatory standards, depending on whether or not the adviser is affiliated with a broker-dealer,” said Jenny Engle, a spokeswoman for Boston-based Fidelity Investments, which is affiliated with a broker-dealer.
“We're urging our members to contact their (Congress) members to oppose the FINRA provision,” said Mr. Tittsworth.
Mr. Tittsworth said FINRA had demonstrated its ineffectiveness and inefficiency by missing the Bernard Madoff pyramid scheme and other major scandals. “The SEC has admitted that it missed Madoff and that it was a serious mistake,” said Mr. Tittsworth. “But FINRA has said they did nothing wrong, even though a host of legal experts have concluded otherwise. Nobody would argue that FINRA has been a paradigm of regulatory effectiveness.”
In response, Nancy Condon, a FINRA spokeswoman in Washington, said the legislation would “simply allow FINRA to put more boots on the ground, subject to SEC oversight, for those firms already regulated by FINRA” and related parties.
“It is disappointing, but not surprising, that industry groups oppose more frequent examination of their firms. Only 9% of (investment adviser) firms are expected to be examined by the SEC next year. It is obvious that these industry groups would like to keep it that way,” she said.
