Posted On: April 30, 2013

Congress Regulates the Securities Regulators

At a hearing in the US House of Representatives about putting the Jumpstart Our Business Startups Act into effect, Rep. Patrick McHenry (R-N.C.) expressed worry that the Securities and Exchange Commission has lost the power to enforce the private offerings general solicitation ban because the rulemaking for the statutory deadline has come and gone. Per the JOBS Act’s Title II, the SEC could write rules to lift the ban for offerings that take place under Rule 144A and Regulation D Rule 506.

The SEC, which put out a proposal, has yet to make a final rule. SEC Chairman Elisse Walter defended the agency’s actions, noting that a comment period is normal. The Commission has been criticized by Republicans and industry members, who contend that its decision to vote on a proposal instead of interim final rules is a way of kowtowing to investor groups. Walter maintains that she has always favored notice and comment rulemaking to put a provision into effect (per the Administrative Procedure Act).

Meantime, Rep. Maxine Waters (D-Calif.), a ranking member of the House Financial Services Committee, once again introduced a bill that would use industry user fees to fund the SEC’s investment adviser examinations. HR 1627 would make advisers under the Commission’s oversight pay fees to cover the “funding gap” in the oversight program. A similar bill that she previously had presented did not move forward, in part because it was competing with former Committee Chairman Spencer Bachus (R-Ala.)’s legislation to place investment advisers under the oversight of a regulator. That bill, too, did not progress.

There has been a lot of disagreement over investment adviser oversight. Per a Dodd-Frank Wall Street Reform and Consumer Protection Act-mandated study in 2011, SEC staff made that recommendation that advisers either be brought under SRO oversight or the agency should be allowed to use user fees to improve its program. The North American Securities Administrators Association and The Investment Adviser Association have both expressed a preference for the user fee option. They oppose the SRO oversight alternative.

Although Walter isn’t pushing for one option or the other, in the interest of investors, she said a solution must be chosen. SEC Chairman Walter believes that Congress needs to take action to fund its investment adviser examination program so that the choice could be effective one. Currently, the SEC examines only about 8% of registered investment advisers each year, while the regulator or the Financial Industry Regulatory Authority examine about 50% of brokerage firms.

Walter is concerned that this will become a bigger problem unless something is done because more new entities, including municipal advisors, will also be subject to the SEC’s examination program. Speaking at the North American Securities Administrators Association Public Policy Conference on April 16, Walter said that unless significant modifications are made, the SEC cannot fulfill its mandate to examine investment advisers.

Shepherd Smith Edwards Kantas, LTD, LLP is a securities fraud law firm that represents investors throughout the US.

McHenry Questions SEC's Authority To Enforce General Solicitation Ban, Bloomberg/BNA, April 18, 2013

Examining Investment Advisers: The Challenge Continues, SEC, April 16, 2013

HR 1627 Investment Adviser Examination Improvement Act of 2013


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