Dodd-Frank placed great confidence in state investment adviser examination programs by increasing state IA oversight to those with $100 million in assets under management, up from $25 million. The switch, targeted for completion on June 28, is the largest single regulatory event involving a coordinated effort by the states and the Securities and Exchange Commission (SEC).
States have been preparing for the switch for more than two years and are ready and looking forward to accepting this increased regulatory oversight of midsized investment advisers.
Dodd-Frank mandated this switch, in part, to address a lack of federal IA oversight. The SEC Section 914 study did not consider or make recommendations regarding state regulated investment advisers. But before this solution even has had the opportunity to kick in, some in Congress are seeking to solve federal examination deficiencies by creating a new self-regulatory organization for state and federal IAs.
But the Investment Adviser Oversight Act of 2012 (H.R. 4624), introduced by Rep. Spencer Bachus, R-Ala., misses the target.
Without any evidence to suggest that state securities regulators are not reliably and effectively fulfilling their IA oversight responsibilities, H.R. 4624 would impose rigid examination standards on state regulators without corresponding standards on either the SEC or self-regulatory organizations (SROs). The bill would also require state governmental agencies to report to an industry-funded membership organization on an annual basis.
State securities regulators share concerns about the inadequate level of oversight provided for federally registered IAs. Investors deserve better than the status quo. But outsourcing governmental responsibility and expanding the financial service industry’s self-regulatory system to include state and federal IAs is a costly and overreaching solution to the current inadequacy of IA oversight at the federal level.