The prospect of FINRA regulation for hedge funds and other money managers is scaring them enough that they are offering to open their wallets to help the SEC expand regulation of their industry.
“We would rather pay user fees to the SEC than have FINRA as the (self-regulatory organization for money managers),” said David Tittsworth, executive director of the Investment Adviser Association, Washington.
“We believe it's important that the SEC have the resources they need to effectively regulate the industry,” said Steve Hinkson, a spokesman for the hedge fund industry's Managed Funds Association, Washington.
A key provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act is responsible for managers' fears. The provision requires the SEC to advise Congress by January whether authorization of an SRO for money managers “would improve the frequency of examinations of investment advisers,” according to the text of the law.
The Financial Industry Regulatory Authority, a Washington-based self-regulatory organization already regulates broker-dealers under oversight of the Securities and Exchange Commission. The SEC currently oversees agency-registered money managers and other investment advisers directly.
Money managers oppose FINRA regulation for a variety of reasons, including the cost of underwriting a new kind of inspection program.
“We would rather have a governmental regulator,” said Mr. Tittsworth in an interview. “The SEC has been dealing with money managers for more than 70 years. They have the expertise and experience to do the job.”
Richard H. Baker, president and CEO of the Managed Funds Association, wrote in a Sept. 22 comment letter to the SEC that his organization “would support appropriate fees on investment advisers to help ensure that (the SEC) has the resources they need to conduct examinations of the investment adviser industry.” He said hedge fund executives are concerned that creating a new SRO “would not result in any public policy benefit, but would create an additional layer of regulation, subjecting advisers to potentially duplicative or inconsistent requirements.”
In an Oct. 19 comment letter, IAA's Mr. Tittsworth said: “We oppose extending FINRA's jurisdiction to investment advisers due (to) its lack of accountability, lack of transparency, costs, track record and bias favoring the broker-dealer regulatory model.”
In an Oct. 25 comment letter to the SEC, the mutual fund industry's Investment Company Institute also opposed SRO regulation of money managers. But the ICI has taken no position on user fees, said Ianthe Zabel, an ICI spokeswoman.
In the comment letter, ICI General Counsel Karrie McMillan wrote: “In the event the SEC determines to outsource its oversight responsibilities over investment advisers to an SRO, we urge that the SRO have the structure and governance appropriate for adviser regulation. FINRA's governing body is not structured for this role. Its expertise is with the suitability standard formerly applicable to broker-dealers, not the higher fiduciary standard followed by investment advisers.”