Securities Law Updates | New Proposed Legislation

May 3, 2012

Bipartisan Bill for More Effective Oversight of Investment Advisers Proposed

Investment Adviser Oversight Act of 2012
H.R. 4624, 4/25/2012

Bipartisan Bill for More Effective Oversight of Investment Advisers Proposed

The Investment Adviser Oversight Act of 2012 would amend the Investment Advisers Act of 1940 to provide for the creation of National Investment Adviser Associations (NIAAs) registered with and overseen by the SEC.  Investment advisers that conduct business with retail customers would have to become members of a registered NIAA.  The SEC would have the authority to approve the registration of any NIAA.

The legislation permits the SEC to suspend or revoke an NIAA’s registration, or censure or impose limits on an NIAA’s activities and operations, if the SEC finds that the NIAA has violated the Advisers Act, SEC rules or its own rules.  The SEC would also be able to suspend or revoke an NIAA’s registration if the association has failed to enforce compliance with any provision by an NIAA member firm or associated person.

The proposal requires the SEC to determine whether an NIAA has the capacity to carry out the purposes of the Advisers Act and to enforce compliance by its members and their employees with the Advisers Act, the SEC’s rules, and the NIAA’s rules before the association can register as an NIAA.

The proposal also recognizes the authority given to the states over small investment advisers in Title IV of the Dodd-Frank Act by preserving state authority over investment advisers with fewer than $100 million in assets under management, so long as the state conducts periodic on-site examinations.

In addition, the SEC must determine that the NIAA’s rules:

• are designed to prevent fraud and protect investors;

• are consistent with the Advisers Act and fiduciary duties under the Act and state law;

• do not impose any burden on advisers that is not in the public interest or for investor protection;

• provide for periodic examinations of members and their related persons, and for coordination of those examinations with the SEC and state securities authorities;

• assure a fair representation of the public interest and the investment adviser industry in its selection of directors and administration of its affairs, and provide that a majority of its directors do not come from the securities industry; and

• provide for equitable allocation of dues and fees and establish appropriate disciplinary procedures for members and their associated persons that violate the Advisers Act, SEC rules or NIAA rules.

Financial Services Committee Chairman Spencer Bachus and Rep. Carolyn McCarthy, a member of the Committee, introduced this bipartisan legislation to what both said would “create more efficient and effective oversight of the retail investment advisory industry.”

Chairman Bachus and Rep. McCarthy introduced their proposal in response to a Securities and Exchange Commission (SEC) study that revealed the agency lacks resources to adequately examine the nation’s nearly 12,000 registered advisers.  As part of its study, which was a requirement of the Dodd-Frank Act, the SEC recommended a self-regulatory organization as one option for Congress to consider as it looks for ways to help the agency monitor the industry.

The Bachus-McCarthy bill would authorize one or more self-regulatory organizations (SROs) for investment advisers funded by membership fees.

Investment advisers and broker-dealers often provide indistinguishable services to retail customers, yet only 8 percent of investment advisers were examined by the SEC in 2011 compared to 58 percent of broker-dealers.

“The average SEC-registered investment adviser can expect to be examined less than once every 11 years.  That lack of oversight, particularly in the aftermath of the Madoff scandal, is unacceptable,” said Chairman Bachus.  “Bad actors will naturally flow to the place where they are least likely to be examined.  Therefore, it is essential that we augment and supplement the SEC’s oversight to dramatically increase the examination rate for investment advisers with retail customers.

“Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments.  For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change,” concluded Chairman Bachus.

View a PDF of the proposed legislation

Also See:

FINRA Issues New Investor Alert: The IRA Rollover: 10 Tips to Making a Sound Decision

The Royal Bank of Scotland Subsidiary Sentenced for Manipulation of Yen Libor

Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of Collateralized Debt Obligations Backed Primarily by Bank-Issued Trust Preferred Securities

Interpretive Guidance on Municipal Advisor Registration Rules Now Out

New Date Announced for Compliance with Final Municipal Advisor Registration Rules

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Companies Mentioned

Securities Law

The following companies are mentioned in Securities Law Updates:

Securities and Exchange Commission

Harris Associates, L.P.

Banc of America Securities LLC

Citicorp USA, Inc.

The Public Employees’ Retirement System of Mississippi

Morgan Stanley & Co., Inc.

Jan Charles Finance S.A.

Park East, Inc.

CIBC World Markets Corp.

Citigroup Inc.

Barclays Capital Inc.

Citigroup Global Markets, Inc.

Societe Generale

SunTrust Bank

TD Securities (USA), Inc.

BMO Nesbitt Burns Corp. n.k.a. Harris Nesbitt Burns Corp.

Consolidated Leasing Hugoton Joint Venture #2

Buchanan Ingersoll & Rooney Professional Corporation

Consolidated Leasing Anadarko Joint Venture

W. R. Huff Asset Management Co., LLC

Guardian Capital Management

ABN AMRO Bank N.V.

Vesta Insurance Group, Inc.

Free Enterprise Fund

Banc of America, N.A.

Torchmark Corp.

Beckstead and Watts, LLP

Barclays Bank PLC

KPMG Peat Marwick, LLP

Deloitte & Touche LLP

Public Company Accounting Oversight Board

BNY Capital Markets, Inc.

Florida State Board of Administration

Credit Suisse Securities (USA) LLC

Credit Lyonnais Securities (USA) Inc.

The Cleaners & Caulkers Local 1 Pension Fund

Credit Suisse, New York Branch

Ameriprise Financial, Inc. f.k.a. American Express Financial Corp.

Deutsche Bank AG

Harris Nesbitt Corp.

California Department of Corporations

The Royal Bank of Scotland plc

RiverSource Investments, LLC

Asset Management Holding AG

Deutsche Bank

Consolidated Management Group, LLC

The Bank of Nova Scotia

Alex Brown, Inc.

Toronto Dominion Texas, LLC f.k.a. Toronto Dominion Texas, Inc.

SG Cowen Securities Corp.

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