Taking further steps toward financial services regulatory reform, the House Financial Services Committee held a hearing October 6 to discuss three legislative discussion drafts put forth by Rep. Paul Kanjorski (D-Pennsylvania) on investor protection, registration of advisors to private funds, and creating a national office of insurance.
Kanjorski, ranking member on the Committee and chairman of the committee’s subcommittee on capital markets, said during his opening statement that his three bills “work to reverse” the trend of excessive deregulation that has existed and caused the financial crisis “by closing loopholes and fixing problems in our broken regulatory structure, especially in our securities and insurance markets.” As Congress works through these drafts and other pieces of financial services reform, Kanjorski said, “We should listen to common-sense ideas and seek out consensus where it exists. I am therefore open to making changes to these draft bills.” However, he said, “We must ensure that special interests do not weaken particular solutions to the point of becoming toothless.”
The first draft bill, the Investor Protection Act, would expand the SEC’s powers and require broker/dealers to adhere to the same fiduciary standard of care as advisors; would increase the SEC’s ability to reward whistleblowers whose tips lead to successful enforcement actions; would allow the Commission to adopt rules to bar the inclusion of mandatory arbitration clauses in securities contracts; would expand on the proposals put forth by the Administration by closing loopholes identified by the Madoff and Stanford Financial frauds; and would double the Commission’s funding over the next five years.
Kanjorski said that because providing the SEC with more “firepower” and more money are “simply not enough,” the draft bill calls for an independent, comprehensive study of the SEC and other regulatory bodies that oversee the securities industry by a “high-caliber body” that can recommend further improvements to the SEC and other regulators.
Fiduciaries, the States, and SROsWhile all those testifying before the Committee agreed that the SEC needs more funding and that broker/dealers that are giving investment advice should be held to the same fiduciary standard of care as advisors (and that fiduciary is indeed a higher standard than suitability), David Tittsworth, executive director of the Investment Adviser Association (IAA), told the committee that “not all broker/dealer activities are [about giving] advice” and therefore the same fiduciary standard should not apply when a B/D is performing other activities.
Tittsworth also said IAA worries that the Investor Protection Act “could impose a fiduciary duty only with respect to retail clients and would water down or eliminate the fiduciary obligations that advisors owe all of their clients—whether individual or institutional.” Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, assured Tittsworth that the Investor Protection Act does “apply to non-retail services.”
Tittsworth and Denise Voigt Crawford, Texas Securities Commissioner and president of the North American Securities Administrators Association (NASAA), testified that a remedy to the infrequency of SEC exams is to raise the $25 million threshold that separates federally registered and state registered advisors to $100 million. “NASAA members are fully prepared and equipped to fill this [oversight] gap by accepting responsibility for the oversight of investment advisors up to $100 million in assets under management,” Crawford told the Committee. By raising the threshold, Crawford said, the “SEC will be left with the giant money managers and the states will take on the smaller shops and it won’t cost the federal government more money.”
Richard Ketchum, chairman and CEO of FINRA, however, reiterated his desire to have FINRA assume oversight of advisors, much like an SRO. “Any such independent regulatory organization for investment advisors should structure oversight programs that are tailored to fit the services investment advisers provide and their role in the market. This type of structure has worked well in the broker/dealer channel, with FINRA working alongside, and overseen by, the SEC,” Ketchum said. “Consider the following: There are nearly 5,000 broker/dealer firms registered with the SEC, and between the SEC and FINRA, approximately 55% of those firms are examined on an annual basis. By contrast, there are over 11,000 investment adviser firms registered with the SEC, and the agency expects only 9% to be examined in fiscal years 2009 and 2010.”
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