H.R. 4624, THE INVESTMENT ADVISER 

OVERSIGHT ACT OF 2012 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 6, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–132 

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H.R. 4624, THE INVESTMENT ADVISER OVERSIGHT ACT OF 2012 

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H.R. 4624, THE INVESTMENT ADVISER 

OVERSIGHT ACT OF 2012 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 6, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–132 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

June 6, 2012 ...................................................................................................... 1 

Appendix: 

June 6, 2012 ...................................................................................................... 43 

WITNESSES 

WEDNESDAY, JUNE 6, 2012 

Brown, Dale E., President and Chief Executive Officer, Financial Services 

Institute (FSI) ....................................................................................................... 8 

Currey, Thomas D., Past President, National Association of Insurance and 

Financial Advisors (NAIFA) ................................................................................ 10 

Helck, Chet, Chief Executive Officer, Global Private Client Group, Raymond 

James Financial Inc.; and Chairman-Elect, the Securities Industry and 

Financial Markets Association (SIFMA) ............................................................ 11 

Ketchum, Richard G., Chairman and Chief Executive Officer, the Financial 

Industry Regulatory Authority (FINRA) ............................................................ 13 

Morgan, John, Securities Commissioner of Texas, on behalf of the North 

American Securities Administrators Association, Inc. (NASAA) ..................... 15 

Tittsworth, David G., Executive Director and Executive Vice President, the 

Investment Adviser Association (IAA) ............................................................... 16 

APPENDIX 

Prepared statements: 

Brown, Dale E. .................................................................................................. 44 

Currey, Thomas D. ........................................................................................... 73 

Helck, Chet ....................................................................................................... 81 

Ketchum, Richard G. ........................................................................................ 94 

Morgan, John .................................................................................................... 103 

Tittsworth, David G. ........................................................................................ 115 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Written statement of the Investment Company Institute ............................ 169 

Frank, Hon. Barney: 

Written statement of the Consumer Federation of America ......................... 174 

Written statement of the Financial Planning Coalition ................................ 177 

Letter from the Project on Government Oversight ........................................ 240 

Frank, Hon. Barney; and Watt, Hon. Melvin: 

Letter from Ernest A. Young, Alston & Bird Professor of Law, Duke 

University School of Law ............................................................................. 249 

Meeks, Hon. Gregory: 

Brief Amici Curiae of the Cato Institute and the Competitive Enterprise 

Institute in Support of Petitioner ................................................................ 256 

Center for Capital Markets Competitiveness report entitled, ‘‘U.S. Capital 

Markets Competitiveness: The Unfinished Agenda,’’ dated Summer 

2011 ................................................................................................................ 289 

(1) 

H.R. 4624, THE INVESTMENT ADVISER 

OVERSIGHT ACT OF 2012 

Wednesday, June 6, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Spencer Bachus [chairman of 

the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Manzullo, Biggert, Capito, Garrett, Neugebauer, McHenry, Campbell, 

Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, 

Hayworth, Renacci, Hurt, Schweikert, Canseco, Stivers, Fincher; 

Frank, Waters, Maloney, Watt, Meeks, Capuano, Hinojosa, McCarthy of New York, Lynch, Scott, Green, Ellison, Perlmutter, and 

Carney. 

Chairman BACHUS. The committee will come to order. We are 

going to have opening statements for a total of 20 minutes, 10 minutes on each side. I will begin with my opening statement. 

This morning, the committee will examine bipartisan legislation, 

the Investment Adviser Oversight Act that Congresswoman McCarthy and I have introduced to protect investors. In September, the 

Subcommittee on Capital Markets held a hearing on the draft 

version of this bill, and I thank both proponents and opponents of 

the legislation who offered constructive suggestions. 

While the average American investor may not understand the 

different titles that investment professionals use, they do believe 

there is a reasonable level of oversight designed to protect their investments from fraud. For broker-dealers, that reasonable level of 

oversight exists. Broker-dealers face routine examinations on a regular and consistent basis. But the average investment adviser is 

examined only once a decade. Even worse, the Securities and Exchange Commission reports that an astonishing 38 percent of investment advisers have never been examined, not once. 

The investing public deserves more timely oversight of these professionals to whom they have entrusted their hard-earned money, 

certainly more oversight than the public received in the Madoff 

case, as well as the very recent case of financial adviser Matthew 

D. Hutcheson, who is known as America’s retirement coach, and 

the indictment of Mark Spangler, former chairman of the National 

Association of Personal Financial Advisors. This bipartisan bill 

helps close what everyone agrees is a glaring regulatory gap, a gap 

that puts average American investors at risk and undermines inVerDate Nov 24 2008 12:09 Feb 15, 2013 Jkt 076103 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\76103.TXT TERRI
2 

vestor confidence. The Dodd-Frank Act recognized that inadequate 

investment adviser oversight is a weakness of our system. 

The SEC study mandated by Section 914 of Dodd-Frank presented Congress with three options. One of those options, which 

authorizes one or more self-regulatory organizations, or SROs, to 

examine investment advisers is, in my opinion, the most practical, 

comprehensive, and streamlined approach to address this weakness. 

But that is not the only possible solution. Obviously, two other 

options were offered by the SEC. But as SEC Chairman Mary 

Schapiro herself stated before this committee on April 15th, ‘‘The 

ability to leverage an SRO organization is really critical. Look at 

our numbers. We examine about 8 percent to 9 percent of investment advisers every year.’’ 

The Consumer Federation of America also stated in testimony 

that an SRO would be ‘‘a significant improvement over the status 

quo.’’ Others have said that more funding for the SEC is the answer. But the SEC itself has admitted that even if the agency receives the full amount of funding it and the Administration requested for 2013, it would be able to examine only 1 in 10 investment advisers annually. I understand why many investment advisers are not enthusiastic about increased oversight. No one is excited when the SEC or any regulator for that matter schedules an 

exam, but when fraud occurs and investors are harmed, outrage, 

bewilderment, and astonishment follow, and Members of Congress 

and the public then properly and predictably ask, ‘‘Where are the 

regulators?’’ 

In fact, they go beyond that, and at least three Members of Congress have filed legislation in these cases asking the taxpayers to 

pick up the tab, or the industry. As I have said repeatedly since 

discussion of this bill began, I stand ready to work with anyone 

who has an idea on how to improve it or another idea. For example, 

some have expressed concerns about the exemptions in this bill. I 

am more than willing to work with any Member or interested 

stakeholder to address these concerns and thereby achieve our objective of protecting retail investors who use the services of investment advisers. 

The only goal of this bipartisan legislation is to deter bad actors 

and help protect the American investors. I see no way to do that 

without timely examinations. The debate over who conducts these 

examinations and how is open to debate, a debate that we will continue today with this hearing. I hope my colleagues will support 

this bipartisan bill that Mrs. McCarthy and I propose. But if they 

do not, I hope they will at least offer constructive suggestions on 

how to either improve this legislation or craft their own solution 

and present it for debate. Until something changes, American investors are at risk of another Madoff scandal. And that ought to 

be a sobering thought, not only for this Congress, but for investment advisers as well. 

At this time, I recognize the ranking member, Mr. Frank. 

Mr. FRANK. Thank you, Mr. Chairman. I will take 4 minutes. 

And I appreciate the fact that we have recognition that we have 

to do a better job of supervision here. And let’s be very clear, this 

is a recognition of the important interaction between the private 

3 

market and a public element of regulation. Now, particular legislation would have the public sector by statute delegate regulatory 

powers to an organization not part of the government. And that is 

a valid option. But it is part of the scheme of regulation, and there 

have been too many people who have talked as if there was this 

problem if you tried to regulate the private sector. So I am glad to 

be here discussing how to regulate, how to use the statutory authority that the Federal Government has to increase regulation 

over an important part of the financial community. And as I said, 

an SRO is this, it would have power only if it is, in fact, delegated 

to us by the Congress. 

Second, one of the things I wanted to do—and I was very pleased 

that the Majority agreed to our insistence that the North American 

Securities Administrators be here. I, from time to time, had the 

privilege of listening to the Secretary of the Commonwealth of Massachusetts, Bill Galvin, who is an outstanding regulator, very active. We have today Mr. Morgan from Texas. Too often, there is an 

irony here, frankly, including some of my conservative friends who 

generally want to talk about Federalism and the limits of State 

power, and we act as if the States are not a factor here. 

State regulation is very important. And I have had a chance to 

read, and I won’t be able to stay, but a very thoughtful testimony 

from our Texas commissioner, and I hope that the members will be 

taking seriously the points that he makes. We should not be—we 

have a Federal statutory authority here that we have given to the 

SEC, and when we talk about how to share that, we should not 

share the States’ role and subject the States to this role without 

their full participation. 

This is not just an SEC/CRO division, it is a three-way. It is the 

SEC and it is the States. And there are some very useful statutes. 

I see the State—and this is the North American Securities Administrators, which in this case are the Canadians as well, which is 

relevant because we don’t have a sharp border here when it comes 

to security. The criticisms in a constructive way that the Commissioner makes should be taken into account. 

Finally, I want to get to the role of the SEC. And yes it is true 

if the SEC was given only what the President asked for, they 

wouldn’t be able to do as much as they should. The President didn’t 

ask for enough. We are talking about relatively small amounts of 

money here. We are talking about an SEC appropriation of $1 billion and some hundreds of millions. I like to have units of measurement. One unit of measurement it seems to me that would be useful when we talk about funding our regulatory agencies is a 

JPMorgan Chase derivative loss. A unit should stand for how much 

JPMorgan Chase lost in one set of derivative transactions. It is 

about $3 billion now—in that one set of transactions, JPMorgan 

Chase lost more than the total budgets of the SEC and the CFTC 

combined. 

The argument that we can’t afford I think is feckless. What we 

need to do in the first place, and I think we can impose more on 

the industry, but my final point is, I would first like to fully fund 

the SEC. We had a very good hearing, Mr. Chairman, and I am 

glad you held it, on the constraints the SEC faces with regard to 

resources, which may lead them sometimes as they acknowledge to 

4 

settle on less terms than they should, less rigorous terms for people 

who have done things wrong. 

So at the very least, the very fact that we are considering an 

SRO argues strongly against the inadequate funding that this Congress has give the SEC. I don’t think the President asked for 

enough. We voted for even less. In the next couple of months, we 

will be considering the CFTC and the SEC, and one of the arguments that this bill should make clear is we need to and can very 

well afford the relatively small amounts of money for increasing 

their funding. 

Chairman BACHUS. Mr. Garrett for 2 minutes. 

Mr. GARRETT. Thank you. Thank you, Mr. Chairman, for recognizing me and for holding this hearing today, and for your legislation as well, to create an SRO for retail investment advisers. I certainly commend the chairman for his leadership on this issue, 

which is a very complicated and challenging issue. 

Ensuring adequate protection exists for all retail investors is a 

top priority, not only for the chairman, but for this committee as 

well. The multi-billion dollar Bernie Madoff fraud has made a detrimental impact on literally thousands of families and people 

across this country. And it was a colossal and historical failure by 

the entity that is supposed to be the lead watchdog for these investors, the SEC. 

Now, the SEC in recent history has been examining investment 

advisers approximately once every 10 years, once every decade. 

And the frequency of examinations of course is not the only consideration. FINRA, for example, examined Madoff’s broker-dealer unit 

and they did it much more frequently, but it still missed the fraud. 

So with too much on its plate, some of the basics aren’t getting 

done apparently. For instance, the SEC now must focus more on 

its core mission of protecting investors and ensuring broader markets and promoting capital formation, and maybe a little bit less 

on politically-motivated agenda items like global warming and political donation disclosures as well. Nevertheless, I look forward to 

a robust discussion of the chairman’s bill today. 

And I am interested to hear from our panel regarding their 

thoughts about how to improve accountability and transparency of 

the SRO model, and also on ideas to ensure a robust cost-benefit 

analysis is conducted for any current and also possible new SROs. 

Finally, I look forward to learning more about other revisions that 

Chairman Bachus has made to his legislation since we held a hearing on this topic, I guess it was back in the fall. 

In the end, we must work to carefully balance the need to sufficiently protect retail investors from doing wrong with the need to 

ensure our Nation’s small businesses are not burdened with new 

and costly regulations. 

Finally, I realize there is no easy answer to this challenging 

issue, and I do give the chairman a lot of credit, and also his staff 

as well, for thoroughly examining this important topic. And I thank 

the chairman again and I thank the members of the panel as well. 

I yield back. 

Chairman BACHUS. Thank you, Mr. Garrett. Mr. Lynch for 3 

minutes. 

5 

Mr. LYNCH. Thank you, Mr. Chairman. And I thank the ranking 

member as well. I would also like to thank our panel here for coming forward and trying to help this committee with its work. Over 

the past 5 years, we have had a series of high-profile Ponzi 

schemes and scandals that have done serious damage to the reputation of the investment adviser community, FINRA, the SEC, 

and Congress, all of which bear some measure of blame for the 

gaps in financial adviser oversight. But the one positive we can 

take away from these events is that we have now called attention 

to the lack of meaningful oversight of the investment adviser community and we provided some momentum for calls for meaningful 

reform. 

One casualty in the wake of the 2008 financial crisis and these 

aforementioned scandals is the integrity of the financial services industry. All of us here today want the same thing basically, and 

that is for the American people to have the confidence that when 

they entrust their savings to investment advisers, those funds are 

invested appropriately and prudently. 

I do applaud the sponsors of H.R. 4624 for putting forward a 

thoughtful approach to improving investment adviser examinations. I believe this bill is a good start. I do have some lingering 

concerns, however, about the bill, particularly the effect that a 

newly-created SRO will have on some of our smaller mom-and-pop 

investment advisers typically examined by the State securities administrators. And also, I believe the bill could do a better job of 

protecting the authority of State regulators. In Massachusetts, as 

the ranking member mentioned, we have a fairly robust examination process headed by our Secretary of State, Bill Galvin. He does 

a good job at this. I would not want to see him shunted to a secondary role or perhaps banned from doing his good work. 

I also think that by making the SRO the sole game, so to speak, 

you are also increasing the burden on some of these State-registered advisers. So hopefully, we can together examine ways to accomplish some of the refinements that I think are necessary with 

the witnesses that we have today. We have a great group, and I 

look forward to a productive discussion. And I want to thank you 

again, Mr. Chairman, and the ranking member for the work you 

have done on this important issue. I yield back the balance of my 

time. 

Chairman BACHUS. Thank you. Are there any other Members 

who wish to be heard? Mr. Scott for 3 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. First of all, I think that 

this hearing is very important. It is very timely. The consumer and 

investment confidence is waning. We need to take some constructive steps to make sure consumer confidence is high. I think that 

the general thrust of this is that there is, and I think we all can 

agree, a critical gap in investor protection. And I think that this 

is supported by some information that in 2011 the Securities and 

Exchange Commission reviewed only 8 percent, only 8 percent of 

over 12,000 registered investment advisers. And this is compared 

to FINRA’s examination of 58 percent of its registers in the same 

year. 

I would say to you, if that was put before the investment community, they would go for examining at the 58 percent level to make 

6 

sure this doesn’t happen. So I think that we really, really need to 

look at this bill. I think it is a good foundation, as any legislation 

is. I think that investment advisers and broker-dealers are, in fact, 

inherently different. So if that is the case, why subject investment 

advisers to the same type of SRO that broker-dealers are currently 

subjected to? 

And so, we have some really serious questions on the preemption 

level. If this bill preempts the States from regulating registered investment advisers, then the question becomes, aren’t the States 

preempted from regulating brokers? So I think we have a lot of 

issues here on the table. I think this bill is a good start. I commend 

both Mrs. Maloney and Chairman Bachus for putting forward the 

bill and I look forward to working with it and moving this whole 

approach forward and making sure that paramount in our minds 

is making sure that investor confidence regains the high plateau 

that it once was before the Bernie Madoff scandal and so many others. Mr. Chairman, with that I yield back the balance of my time. 

Chairman BACHUS. We have approximately 2 minutes left on our 

side, and none on the other side. What we are going to do is increase to three on our side, and one on your side—we are going to 

cede you all 1 minute, which will give Mrs. McCarthy 2 minutes, 

Mr. Hinojosa wants a minute, and then I will take the one remaining minute. 

Mr. FRANK. Mr. Chairman, thank you. That is very gracious. 

Chairman BACHUS. Thank you. Mrs. McCarthy? 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. And 

I thank the ranking member. I usually don’t do opening statements. I always want to come to these hearings to hear the witnesses. I think there has been a lot of misinformation on the bill. 

And obviously, we have a hearing to clear up the misinformation 

that is out there. But also, this is the first step. We go forward, 

we work, there will be amendments before a markup. I happen to 

think that this is a great start. We keep talking about Madoff, but 

let me tell you, in New York and Long Island, we have had many, 

many cases of fraud, unfortunately, and that hurts my investors. 

And I think it is something that we need to do. I think that also, 

you will see when the bill is exactly explained that the States are 

still going to have the oversight. We are going to be working with 

the States. This is going to be a partnership. 

Would I prefer if we went through the SEC? Absolutely. Are we 

going to get the money to do it? No, we are not. I would love to, 

but it is just not going to happen. So to me, this is a great start. 

This is where certainly we can protect our constituents. And I 

think that is the bottom line for all of us to do. So with that, Mr. 

Chairman, I yield back the rest of my time. 

Chairman BACHUS. Thank you. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Chairman Bachus, and thank you, 

Ranking Member Frank, for holding this hearing today. And thank 

you to our esteemed panelists for your testimony, which I look forward to hearing. I wish to speak about two issues in particular 

that concern me about creating a new self-regulatory organization 

or adding more jurisdiction to FINRA’s oversight. I have heard 

from small independent advisers by calling them and asking for 

7 

their opinion, and they are advisers with less wealthy clients in my 

congressional district who will be subject to a new added expense 

for regulatory oversight if this policy takes place. They are concerned about the effect of member fees on their ability to serve as 

independent advisers. With that, I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you. We have a little over a minute 

remaining on our side. Let me point out three things. First, Madoff 

has been mentioned, that FINRA missed Madoff. FINRA regulated 

the broker-dealer side of Madoff. It was on the investment adviser 

side where the fraud went on, so they could not regulate that. That 

was up to the States and the SEC where that fraud took place. 

Second, I can say that State regulators have done an exceptionally good job. I think they have done a better job than Federal regulators. And they now, under this bill, will regulate not only the 

small investment advisers, but also the mid-sized investment advisers. In fact, after the Dodd-Frank transfer occurs, the SEC will 

oversee approximately 10,000 investment advisers and the States 

will take on approximately 4,200 additional investment advisers 

with up to $100 million in assets under management, according to 

my staff’s estimate. And we want to be very sensitive to the State 

regulators and make sure that this bill does not preempt your ability. 

I know there has been some expression, and I know Mr. 

Ketchum has said several times he wants to have better cooperation, and I think that is key. And if there is something else we 

need to do. I know the State actor doctrine, I have heard cases 

where the State regulators contacted FINRA, and FINRA said, ‘‘We 

can’t go into that because it is a State action.’’ And I am not sure 

that is a good situation. That needs to be refined. But we very 

much want to do what is right. 

And the third point is, and Mr. Morgan said that some of the investment advisers, regulatory fatigue. We don’t want to unnecessarily burden investment advisers. But at the same time we do 

want to, they need to be examined, and I think they agree with 

that. And I think we are all open to saying that it is not duplicitous 

or that it is not overbearing. And this is not a markup, this is a 

hearing, and there is a big difference. People out in the public may 

not know the difference, but you gentlemen know the difference. I 

am very sensitive to State regulation. I think States have done an 

outstanding job. I know independent advisers in Alabama usually 

behave because of Joe Bohr. 

Mr. FRANK. Mr. Chairman, I have an unanimous consent request— 

Chairman BACHUS. Without objection, it is so ordered. 

Mr. FRANK. —to enter into the record four statements from an 

individual in some organizations in opposition to the bill, in some 

cases, in principle, in some cases, as drafted. One is from the 

Project on Government Oversight. Another is from Professor Ernest 

Young at Duke Law School. One is from the Financial Planning Coalition. And one is from the Consumer Federation of America. And 

I ask unanimous consent that they be introduced. And my colleague from North Carolina, I believe had a similar unanimous 

consent request. 

8 

Mr. WATT. Mr. Chairman, I was going to offer for the record the 

letter to you and Mr. Frank from Professor Ernest Young. But I assume that is the same letter that is being entered into the record. 

Mr. FRANK. I apologize for preempting North Carolina’s representation on one of its premier institutions. It is the same guy. 

Mr. WATT. I have to look out for my little brother institution. 

Chairman BACHUS. Without objection, those letters are introduced. And the coalition is actually a coalition of three different financial planning groups. 

Mrs. MALONEY. May I have unanimous consent to put my opening statement into the record? 

Chairman BACHUS. Okay. Without objection, all Members’ opening statements will be made a part of the record. 

Ms. Waters? 

Ms. WATERS. I ask unanimous consent to have my opening statement entered into the record. 

Chairman BACHUS. So ordered. With that, we will hear from our 

esteemed panel: Mr. Dale Brown, president and chief executive officer of the Financial Services Institute; Mr. Thomas Currey, past 

president, National Association of Insurance and Financial Advisors; Mr. Chet Helck, chief operating officer, Raymond James Financial, Inc., on behalf of SIFMA; Mr. Richard Ketchum, chairman 

and chief executive officer, the Financial Industry Regulatory Authority; Mr. John Morgan, Securities Commissioner of Texas, on behalf of the North American Securities Administrators Association; 

and Mr. David Tittsworth, executive director and executive vice 

president, the Investment Adviser Association. 

We welcome all you gentlemen. And Mr. Brown, you can proceed 

with your opening statement. 

STATEMENT OF DALE E. BROWN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FINANCIAL SERVICES INSTITUTE (FSI) 

Mr. BROWN. Thank you, Mr. Chairman. I am Dale Brown, president and CEO of the Financial Services Institute, and I am pleased 

to express our support for the Investment Adviser Oversight Act. 

We urge the committee at the right time to approve this bill because it will protect Americans who need investment advice. An effective regulatory structure for all financial advisers is a critical 

component to building and maintaining the trust of American savers and investors. FSI’s more than 100 member firms and 35,000 

financial adviser members, most of whom are small businesses, 

work with middle-class investors across America. Our members are 

regulated under both broker-dealer and investment adviser rules. 

They rely on their personal reputations to earn and maintain trusted client relationships. They have a powerful incentive to put their 

client’s interest first and to embrace the highest ethical standards 

and most effective oversight that will bolster their client’s trust. 

These clients are saving and investing for retirement, for their 

children’s educations, and to care for their aging parents. Today, a 

middle-class family who wants professional help with investing 

their kid’s college fund has no real way of knowing if someone is 

checking up on their investment adviser. FINRA might have audited their adviser in the last 2 to 3 years, or that adviser might 

not have seen an SEC examiner since 1999, if at all. 

9 

American investors should not have to be regulatory experts to 

know whether they are being protected. There are many reasons 

for this unacceptable regulatory gap, but the question today is, how 

do we close it? We believe H.R. 4624 is the best solution for this 

urgent investor protection problem. The bill would shift the responsibility for investment adviser examinations from the SEC to an 

independent regulator paid for by the industry, not taxpayers. This 

would free the SEC to regulate the regulator as it has done for decades for the brokerage and municipal securities industries, among 

others. 

The Dodd-Frank Act identified this serious regulatory gap. 

Under the status quo, broker-dealers face routine examinations 

every 2 to 3 years. In contrast, the typical investment adviser is 

examined on average once every 13 years. The SEC told this committee that it had examined only 8 percent of registered investment advisers in 2011. They also revealed that nearly 40 percent 

have never been examined, not even once. This is not acceptable. 

In its Section 914 study, the SEC called it very unlikely that they 

will ever have the resources to conduct RIA examinations with adequate frequency. Their recommendations laid the groundwork for 

this bill—18 months ago, FSI endorsed FINRA as the best choice 

for an independent industry regulator for retail investment advisers. 

FINRA already has a solid working relationship with the SEC 

and an infrastructure in place that it can adapt quickly to supervise and examine RIAs. I am avoiding the term self-regulatory organization and SRO because frankly they have become misnomers, 

implying that the industry regulates itself. This is simply not true 

under FINRA. FINRA’s governing board is a majority of non-industry public members and their staff are professional experienced 

regulators. We have no illusions that FINRA is a perfect regulator. 

Some of the criticism it is receiving is valid. Many credible observers, such as the GAO, have documented areas in which FINRA can 

improve its transparency and accountability. FINRA should embrace these reforms as it continues to improve as the broker-dealer 

regulator and become the investment adviser regulator. 

The issue of cost associated with H.R. 4624 is important and 

shouldn’t be downplayed. The hard truth is that any remedy for 

this unacceptable regulatory gap will cost money. We have an opportunity to solve the problem in a way that does not burden the 

taxpayer and closes this gap quickly and cost-effectively. The Bachus/McCarthy proposal does just that. I have many friends in the industry, including some FSI members, who are adamantly opposed 

to this bill. I respect their views, but the status quo is not acceptable. So let us work together toward a practical solution that will 

benefit American savers and investors. It is the right thing to do. 

Thank you, Chairman Bachus and Congresswoman McCarthy, 

for taking this critical bipartisan step forward. We urge the committee to pass this bill as quickly as possible. Thank you very 

much. 

[The prepared statement of Mr. Brown can be found on page 44 

of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Currey? 

10 

STATEMENT OF THOMAS D. CURREY, PAST PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS (NAIFA) 

Mr. CURREY. Good morning, Chairman Bachus, Ranking Member 

Frank, and members of the committee. My name is Tom Currey, 

and I am here on behalf of the of the National Association of Insurance and Financial Advisors, or NAIFA. For more than 30 years, 

I have been licensed as a registered representative of my brokerdealer, and for more than 10 years, I have been licensed as an investment adviser representative for my corporate RIA. This is in 

addition to my insurance licenses in Texas and California. 

I appreciate the opportunity to share with you why NAIFA supports the Investment Adviser Oversight Act of 2012. NAIFA has always supported smart, balanced regulation that provides consumer 

protections without creating compliance burdens that would impede our members’ ability to serve the middle market. H.R. 4624 

satisfies those criteria. 

NAIFA members are largely small business owners serving the 

middle class. Most of our clients have household incomes of less 

than $100,000, with less than $50,000 invested in financial markets. And that is true for my practice as well. My clients—who 

span several generations; I am now working with children of some 

of my early clients and even, in some cases, grandchildren—average between $50,000 and $250,000 investable assets, and almost 

all of them had less than $50,000 to invest before we started working together on their financial plans. 

In short, we are Main Street, not Wall Street. We help Main 

Street investors achieve their financial goals by offering them financial advice and services they can afford. Two-thirds of us are 

broker-dealer registered reps and like me, about 40 percent of the 

registered reps are also investment adviser representatives. Today, 

we spend an average of nearly 530 hours every year on compliance 

and examination costing us more than $8,800 annually, a substantial amount of time and money, since many members may only 

have one additional person on staff. 

Today, the SEC only examines 8 percent of investment advisers 

every year, and one-third of investment advisers have never been 

subject to an SEC compliance exam. FINRA, on the other hand, examined 57 percent of its broker-dealer members in 2008 and 54 

percent in 2009. NAIFA members are generally audited by their 

broker-dealers annually, but there is no consistent examination 

practice for investment adviser representatives. There is a consensus that the gap between these two regimes should be filled. 

From NAIFA’s perspective, allowing FINRA to serve as the SRO 

for investment advisers is the logical way to fill the gap. The Investment Adviser Oversight Act would get us there. And virtually 

all of our members who are investment adviser representatives are 

also broker-dealer registered, thus, they and the broker-dealers 

with which they are affiliated already are subject to FINRA oversight. Requiring broker-dealers and investment advisers to be subject to two distinct regulatory regimes and corresponding examination processes is burdensome and unnecessary. 

This is in no one’s interest. Coordination of the rules and examinations for both sides of the business, however, would best serve 

11 

all constituents’ interest. Simultaneous broker-dealer and registered investment adviser exams would not only lead to a more effective examination process; it would be less burdensome and intrusive for financial professionals than having to submit to different 

exams at different times in order to comply with the rules and 

schedules of different regulators, or SROs. 

It would clearly be more efficient and cost-effective for NAIFA 

members if FINRA were allowed to expand its current substantial 

examination capabilities to cover registered investment advisers 

than it would be to subject NAIFA members to a new SRO or to 

the SEC to perform this function. 

Our hope is that the final result of this process will be an efficient regulatory scheme that protects middle market investors and 

the professionals who serve them. NAIFA is eager to continue 

working with the committee to ensure that investors are protected 

and have access to competent financial advice and services. Thank 

you very much for the opportunity to present NAIFA’s views to you 

today, and I would be pleased to answer your questions when appropriate. 

[The prepared statement of Mr. Currey can be found on page 73 

of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Helck? 

STATEMENT OF CHET HELCK, CHIEF EXECUTIVE OFFICER, 

GLOBAL PRIVATE CLIENT GROUP, RAYMOND JAMES FINANCIAL INC.; AND CHAIRMAN-ELECT, THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. HELCK. Chairman Bachus, Ranking Member Frank, and 

committee members, my name is Chet Helck. I am chairman-elect 

of the Securities Industry and Financial Markets Association, 

known as SIFMA. I also am the CEO of the global private client 

group for Raymond James Financial, which has over 6,000 financial advisers operating in 2,500 locations in all 50 States, and who 

serve over 2 million client accounts. 

SIFMA supports H.R. 4624 as introduced by Chairman Bachus 

and co-sponsored by Representative McCarthy. We believe this bill 

will result in enhanced oversight of retail investment advisers, and 

thereby better serve and protect individual clients. Over the years, 

the retail advisory services of investment advisers and broker-dealers have converged. Today, broker-dealers provide some of the 

same services as investment advisers. We believe that the same 

services should be held to the same standard. That is why SIFMA 

supports the establishment of a uniform fiduciary standard for brokers and advisers when they provide personalized investment advice about securities to retail clients. 

We also believe that when brokers and advisers provide the same 

service, they should be subject to the same level of examination 

and oversight. Currently, broker-dealers are subject to FINRA, 

SEC, and State regulation and are generally inspected by FINRA 

biannually, and in larger firms such as ours, much more frequently. Investment advisers, however, are not subject to oversight 

by a so-called SRO and are inspected by the SEC only about once 

every 11 years. This gap in oversight is unacceptable and must be 

12 

addressed given the billions of dollars of client assets that are entrusted to retail investment advisers. Individual clients would be 

better protected by consistent standards for and consistent examination and oversight of investment advisers and broker-dealers 

that provide retail advisory services. 

We support H.R. 4624 because we believe it will directly benefit 

and protect the investing public. We note that last year, the SEC 

was only able to examine 8 percent of registered investment advisers. Since 2004, the number of SEC examinations has decreased by 

nearly 30 percent and the frequency by 50 percent. To increase the 

frequency of examination to acceptable levels, SEC Commissioner 

Walter stated that the SEC would need to add more than 2,000 examiners to its advisory program. Of course, individual investor protection requires more than just proper examination or audit levels. 

The oversight afforded by an SRO would better ensure that retail 

investor advisers develop and maintain policies, procedures, and 

systems necessary to meet the ongoing obligations in their individual clients at the highest levels. 

A retail adviser SRO with oversight over the thousands of IRAs 

that are not regularly examined by the SEC today would effectively 

supplement the SEC’s resources in the same way that FINRA supplements the SEC in the oversight of broker-dealers. In our view, 

the so-called adviser SRO option most directly answers the question posed by Congress under Dodd-Frank, Section 914, because it 

would, in fact, increase the frequency and number of examinations 

for retail investment advisers. But let us be clear about the term 

‘‘self-regulatory organization,’’ or SRO. 

We need to understand that the term is a misnomer. Here we are 

not asking an industry to self-regulate or police itself. On the contrary, today, regulatory organizations like FINRA are independent 

and self-funded and their priority is to protect investors. As recently as 2010, Congress recognized this shift when it expanded the 

Municipal Securities Rulemaking Board’s (MSRB’s) regulatory authority and remodeled the MSRB’s board of directors after FINRA’s 

as a majority public board. 

Today, the term ‘‘independent self-funded regulatory organization,’’ or IRO, is the more accurate way to describe and convey the 

integrity and quality of the modern financial services regulatory organization. This is the type of regulatory organization that H.R. 

4624 would authorize and that we would support. At the same 

time, we should recognize that this bill represents a key opportunity to improve upon the existing SRO regime, to improve upon 

FINRA, and to take what is working well at FINRA and other 

SROs and build upon it to create an optimal regulatory organization for retail investment advisers. 

Specifically, we support the bill’s approach to the rulemaking 

process for adviser SROs and the requirement for the SRO to consider costs and benefits. We do believe, however, that the cost-benefit requirements should be enhanced to improve the transparency 

and accountability of the SRO. We also believe that both rulemaking procedures and cost-benefit requirements should be equally 

extended and applied to broker-dealer organizations like FINRA. 

In closing, we support H.R. 4624 because it creates a retail adviser SRO that will increase the amount and frequency of oversight 

13 

to an appropriate level and also help ensure a uniform level of 

oversight consistent with uniform standard of care for brokers and 

advisers. Accordingly, we fully expect the bill will better protect 

and serve individual clients. Thank you. 

[The prepared statement of Mr. Helck can be found on page 81 

of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Ketchum? 

STATEMENT OF RICHARD G. KETCHUM, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, THE FINANCIAL INDUSTRY 

REGULATORY AUTHORITY (FINRA) 

Mr. KETCHUM. Thank you. Chairman Bachus, Ranking Member 

Frank, and members of the committee, I am Richard Ketchum, 

chairman and CEO of the Financial Industry Regulatory Authority, 

or FINRA. On behalf of FINRA, I would like to thank you for the 

opportunity to testify today. No one involved in regulating securities and protecting investors can be satisfied with a system where 

only 8 percent of investment adviser firms are examined each year 

by the SEC. Yes, that is the system we have today. It is an unacceptably low level of oversight and represents a major gap in investor protection. The many Americans who choose to invest through 

advisers deserve better. Further, because broker-dealers and investment advisers operate under vastly different levels of oversight, firms offering similar services can arbitrage regulation. They 

may simply choose the form of registration that offers the least 

oversight and minimizes the risk of enforcement against misconduct. 

H.R. 4624 represents a direct bipartisan response to this problem 

and would help fill the gap in the protection of investment adviser 

clients. Specifically, the legislation addresses the current lack of 

government resources and allows self-regulatory organizations to 

assist in providing closer and more regular oversight of investment 

advisers who serve predominantly retail customers. 

The SEC oversees more than 12,000 investment advisers, but in 

2010 conducted only 1,083 exams of those firms due to lack of resources. This means that the average registered adviser could expect to be examined less than once every 11 years. Further, approximately 38 percent of advisers registered with the SEC have 

never been examined. By contrast, the SEC and FINRA examine 

more than 50 percent of broker-dealers annually. 

The SEC study on investment adviser exams released last year 

concludes that the Agency will not have sufficient capacity in the 

near or long-term to conduct effective examinations of registered 

investment advisers with adequate frequency. This gap in investment adviser oversight is a significant threat to the protection of 

advisory clients and should be addressed as quickly as possible. 

The bipartisan legislation introduced by Chairman Bachus and 

Congresswoman McCarthy would establish SEC authority for designating adviser SROs and set a framework of requirements for 

any entity designated as such. 

These requirements would ensure that the oversight by any adviser SRO reflect the nature and diversity of the investment advisory industry and ensure that investment advisers are examined 

14 

regularly. H.R. 4624 would guarantee that adviser SROs perform 

regular examinations on investment advisers while not imposing 

unnecessary burdens. The legislation would also provide assurance 

that a registered representative who wears two hats could not escape inspection as an investment advisory representative even 

while being subject to SEC oversight as a broker-dealer—SRO oversight as a broker-dealer representative. 

In addition, the legislation would also ensure that the Investment Advisers Act is enforced and that those advisers who commit 

serious offenses will be disciplined, and if necessary, removed from 

the industry. 

It is important to note the important consideration the bill gives 

to SRO structure and oversight. The legislation sets out criteria for 

governance that would require any adviser SRO to have a majority 

public board. It also includes members of the investment adviser 

industry. Also, the legislation establishes a high standard for SEC 

approval of SRO rules in the adviser area and a requirement for 

consultation with the SEC in developing an examination program 

for investment advisers. 

We support that approach. The concept of an SRO for investment 

advisers is not a new one. The SEC recommended establishing an 

investment adviser SRO in the special studies securities markets 

conducted in 1963. In 1989, the Commission submitted legislation 

to Congress that would authorize an SRO for investment advisers. 

In the nearly 5 decades that have passed since the adviser SRO 

concept was first introduced, protections afforded to investors have 

only waned. It is clear that none of the approaches taken during 

that time have allowed oversight to keep up with the growth in the 

adviser industry. 

This situation must be addressed in a way that delivers real and 

timely results for investors. Just as FINRA, the SEC, and the 

States work together in overseeing broker-dealers, we believe government regulators and SROs could have the same valuable collaboration relative to investment advisers. Providing the SEC authority to designate one or more SROs to assist in overseeing investment advisers is the most practical and efficient way to address 

this critical resource and investor protection issue. 

Finally, Mr. Chairman, let me end by addressing the very legitimate concerns raised by a number of members of the committee 

with respect to the impact on small investment advisers. Let me 

be clear, the bill provides that with respect to any State program 

that has an active exam program, the SRO would not engage in 

oversight examinations. I want to assure you that with respect to 

any members of FINRA of an investment adviser—SRO, that we 

would expect that fees for those entities with respect to States that 

have an active program to be extremely low. As an example of that, 

out of our less than 5,000 firms, 1,700 of those firms paid less than 

$1,000 in 2011 as a matter of fees. I can assure you that we would 

look as well for those compliant investment advisers who are subject to active State oversight to pay extremely low fees. Thank you 

very much. I look forward to answering any questions you may 

have. 

[The prepared statement of Mr. Ketchum can be found on page 

94 of the appendix.] 

15 

Chairman BACHUS. Thank you. 

Commissioner Morgan? 

STATEMENT OF JOHN MORGAN, SECURITIES COMMISSIONER 

OF TEXAS, ON BEHALF OF THE NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. (NASAA) 

Mr. MORGAN. Good morning, Chairman Bachus, Ranking Member Frank, and members of the committee. I am John Morgan, the 

Securities Commissioner of Texas and a member of the North 

American Securities Administrators Association, NASAA, the association of State and provincial securities regulators, and I am honored to be here today on behalf of NASAA to discuss H.R. 4624. I 

would like to emphasize just a few points and I would like to do 

so by using my State as an example. Texas is different in some 

ways from other States, but the same in many others. It is known 

for having a tough securities law enforcement program. And the 

number of indictments and convictions for securities fraud and related offenses every year is a reflection of that. But it is also a 

State that works to strike a regulatory balance that is not overly 

burdensome and fosters economic development while maintaining 

important investor protections. 

It is home to about 1,100 investment advisers registered and regulated solely by Texas. And just like other States, the firms registered in Texas are located in communities throughout the State. 

These are not just in the big cities. They are in places like Flint, 

Jacksonville, Beeville, Alice, and Farwell, where small firms are 

working in their communities to help residents meet financial goals 

and save for college educations and retirements. 

And these are small businesses where cost really matters. Many have investor assets under management of $5 million to $10 million, and for them, charging the usual 1 percent to 1.25 percent 

management fee realizes an income of $50,000 to $125,000, and 

that is before rent, salaries, taxes, insurance, utilities, and other 

costs of compliance. Costs of compliance in Texas include a $275 

registration fee each year, and keeping up with the extensive State 

regulations requiring maintenance of records, regulatory reporting, 

supervision, disclosure to clients, advertising, and custody of client 

funds. 

They must also find ways to keep up with changes to those regulations when they occur. And just as is the case with other States, 

these firms are subject to inspections. In Texas, these are on-site, 

unannounced inspections, and generally occur on a 5-year cycle. 

But additional funding approved during the last session of the 

Texas legislature should enable the agency to improve the cycle to 

about 4 years going forward. That is good, but it is not as good as 

some other States with 1- to 3-year inspection cycles. A recent survey of NASAA jurisdiction shows that 89 percent of States conduct 

on-site inspections on a formal cycle of 6 years or less. 

There are a very small number of States that take a different approach. These States may benefit from the ability going forward to 

augment their examination capabilities, but that should be studied, 

tailored to the needs of that jurisdiction, and addressed at the direction of that jurisdiction. H.R. 4624, as drafted, would require 

firms already well-regulated by the States to become members of 

16 

a self-regulatory organization. That is not necessary. There is no 

regulatory gap there. But worse is the requirement of membership 

costs and ongoing costs of compliance with the new self-regulatory 

organization. 

Much has been said in recent weeks regarding the potential cost 

burden on investment advisers generally, although it is unclear the 

size of the burden on State-registered investment advisers. One 

thing is known, the economics for many State-registered investment advisers plainly indicates that it is perilous for these firms 

to be forced to bear the weight of another layer of regulation and 

cost, particularly when it is unnecessary to do so. I have heard 

from a group of these firms in Texas who are very worried about 

this, and I have also spoken to individuals who help State-registered firms remain in compliance. 

The chorus is the same. There is regulatory fatigue. These small 

firms have already undergone significant regulatory changes and 

they just want to be able to focus on the markets and on their clients. They have said that small advisers will see the advent of a 

new regulatory body as the final straw, and will simply close their 

doors, and those are their exact words. A survey of investment advisers registered in Massachusetts released last week by Secretary 

of the Commonwealth William Galvin showed that about 40 percent responding to the survey provided comments suggesting that 

the bill as presently drafted would force them out of business. 

Mr. Chairman, Texas and Massachusetts are very different 

places, but the message I am hearing from investment advisers is 

the same, as heard by Secretary Galvin. The unintended consequence of H.R. 4624 as presently written may be that of a job 

killer. There is a belief strongly held where I come from that regulatory oversight should be effective and not unduly burdensome. 

And the States that do this work as I have described are performing that work in that exact way with respect to investment adviser regulation, and they absolutely need to be excluded from 

whatever solution is created to address the regulatory gap that has 

been identified at the Federal level. Thank you for the opportunity 

to speak with you today. 

[The prepared statement of Commissioner Morgan can be found 

on page 103 of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Tittsworth? 

STATEMENT OF DAVID G. TITTSWORTH, EXECUTIVE DIRECTOR AND EXECUTIVE VICE PRESIDENT, THE INVESTMENT 

ADVISER ASSOCIATION (IAA) 

Mr. TITTSWORTH. Chairman Bachus, I greatly appreciate the opportunity to provide our views today. Our organization represents 

SEC-registered investment advisory firms. Our members serve a 

wide range of clients, from individuals, trusts, and families, to endowments, charities, foundations, State and local governments, 

pension funds, mutual funds, and private funds. Our diverse membership provides a broad spectrum of advisory services on behalf of 

their clients. They perform a critical role in helping investors 

achieve their financial goals. When provisions of Dodd-Frank are 

implemented this summer, there will be about 10,500 SEC-regVerDate Nov 24 2008 12:09 Feb 15, 2013 Jkt 076103 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\76103.TXT TERRI
17 

istered investment advisers. It is critical to remember that most of 

these firms are small businesses. More than half employ fewer 

than 10 employees, and more than 85 percent employ fewer than 

50 employees. 

It is also important to understand that investment advisers are 

already comprehensively regulated. Our written statement outlines 

the rigorous and extensive regulations and laws that all investment advisers must adhere to no matter their size or resources. 

Additional regulations are not needed to address the issue at hand. 

Indeed, the issue at hand is clear: to find the best way to strengthen investment adviser oversight. We strongly support efforts to enhance SEC inspections. Our members know that effective and robust oversight is essential to investor protection and confidence. 

While the SEC has taken steps to improve its program, we believe more can and should be done. Section 914 of Dodd-Frank directed the SEC to study how to enhance adviser examinations. The 

report issued last year is very instructive. It sets out three options: 

investment adviser user fees; an SRO for advisers; or extending 

FINRA’s jurisdiction to dually registered firms. Of these options, 

the report suggests that user fees have the greatest advantages, 

and we agree. 

We have reviewed H.R. 4624 as recently introduced by Chairman 

Bachus and others. The bill mandates membership in a nongovernmental SRO for many SEC-registered, as well as all State-registered investment advisers. The bill would subject thousands of 

advisory firms to broad rulemaking, inspection, and enforcement 

authority by an SRO, in all likelihood, FINRA. 

We strongly oppose H.R. 4624. Outsourcing the SEC’s responsibilities to an SRO is not the most efficient or effective way to enhance adviser oversight. The substantial drawbacks to an SRO outweigh any potential benefits. These drawbacks include insufficient 

transparency and accountability as well as greater costs. 

Other organizations agree with our position. Indeed, many diverse groups, including the U.S. Chamber of Commerce, GAO, the 

Cato Institute, and the Project on Government Oversight have 

catalogued the drawbacks, costs, and inefficiencies of the SRO 

model, and FINRA in particular. H.R. 4624 unfairly targets small 

businesses. Because of exemptions in the bill, smaller advisers are 

singled out for additional regulation and costs, while larger advisers are unaffected. The substantial costs and bureaucracy of an additional, unnecessary layer of SRO regulation and oversight would 

have a significant adverse impact on small businesses and job creation. The bill would also result in inconsistent regulation and encourage regulatory arbitrage. 

As documented in a recent Boston Consulting Group report, the 

cost of FINRA oversight will be significantly greater than an incremental increase in SEC resources. And at any rate, the SEC will 

incur additional costs to exercise appropriate oversight of FINRA. 

The much better alternative is to build on the SEC’s examination 

program. The SEC, a governmental regulator accountable to Congress and the public, has more than 7 decades of experience and 

expertise regulating and inspecting investment advisers. To 

achieve more robust oversight, we would support legislation imposVerDate Nov 24 2008 12:09 Feb 15, 2013 Jkt 076103 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\76103.TXT TERRI
18 

ing appropriate user fees on SEC-registered investment advisers in 

lieu of an SRO. 

This legislation should specify that user fees will be solely dedicated to an increased level of advisory examinations, and it should 

also include reporting and review requirements to ensure full accountability and transparency. 

Thank you again for the opportunity to testify. I would be happy 

to answer any questions. 

[The prepared statement of Mr. Tittsworth can be found on page 

115 of the appendix.] 

Chairman BACHUS. Thank you. 

Before I ask questions, I do want to clarify two things. Mr. 

Tittsworth, I think you and I disagree on whether the U.S. Chamber of Commerce opposes this legislation. I think I heard you say 

that. 

Mr. TITTSWORTH. Mr. Bachus, I don’t think that they have taken 

a particular view on this legislation. The Chamber of Commerce 

issued a report last summer— 

Chairman BACHUS. On SROs? 

Mr. TITTSWORTH. —and it was very critical of SROs and FINRA. 

Chairman BACHUS. On their cost? 

Mr. TITTSWORTH. Yes, sir. 

Chairman BACHUS. I agree, but they have not taken a position 

against this bill. 

Mr. TITTSWORTH. To my knowledge, that is correct. 

Chairman BACHUS. And I think you said the SEC in their report 

indicated that they favored user fees, but I have never read that 

either. 

Mr. TITTSWORTH. I understand that. I guess different people will 

come to different conclusions. What I said in my statement is that 

the report suggests there are the greatest number of advantages to 

user fees. 

Chairman BACHUS. It actually suggests that is the better path? 

Mr. TITTSWORTH. That is correct. 

Chairman BACHUS. Does it say that, or is that your interpretation of it? 

Mr. TITTSWORTH. That is my interpretation. I would be happy to 

stand by that. 

Chairman BACHUS. Yes, I have read it, and I don’t see that. But, 

reasonable people can disagree. 

You talk about a user fee, that you are advocating a user fee 

being paid by investment advisers. That would be an increased 

cost, would it not? 

Mr. TITTSWORTH. Absolutely. 

Chairman BACHUS. How much do you envision that a small investment adviser would pay? 

Mr. TITTSWORTH. That is a great question, Mr. Chairman. I 

guess the answer is: what is the additional total cost divided by the 

number of firms that would have to pay the fee? And then I think 

it would have to be adjusted based on other factors: the size of the 

firm; complexity; risk factors; and those types of things. 

Chairman BACHUS. But if under the SRO—and I know Mr. Stivers has a suggestion, an amendment to make a de minimis fee for 

19 

small investment advisers to the SRO. Would you be opposed to a 

de minimis fee? 

Mr. TITTSWORTH. I think that it is always hard to support any 

fees. The bottom line is, whatever approach you are going to take 

here, there are going to be additional costs. Somebody is going to 

have to bear those costs. So I think that while we particularly appreciate the problems of small businesses with less resources, I 

think that spreading the pain, if you will, is something that is 

going to have to happen. 

So again, I think you have to look at the total cost and divide 

that by the total number of companies that would have to pay either to the SEC or to Mr. Ketchum and FINRA. 

Chairman BACHUS. Mr. Ketchum, the Boston Consulting Group, 

Mr. Tittsworth and, I think, two other organizations, you all funded a study that they made, and they were critical of the costs of 

what you all were charged. Did they ever approach you and ask 

you for information on the potential costs? 

Mr. KETCHUM. No, they did not. They never talked to us once to 

understand our exam program or to have any understanding of 

how we would conduct a program with respect to investment advisers if we were authorized as a self-regulatory organization. 

Chairman BACHUS. How did they create their estimate without 

talking to the SRO? 

Mr. KETCHUM. I honestly can’t imagine. They used a variety of 

assumptions, one of which was that, notwithstanding the fact that 

FINRA had standing an examination program for broker-dealers 

with offices around the country, with the technology to support it, 

and notwithstanding the fact that approximately 87 percent of the 

registered individuals who were registered as investment advisers 

are affiliated with a broker-dealer, that there would essentially be 

virtually no synergies, they were wrong with that. 

They also made the assumption—because there is much to what 

Mr. Tittsworth says about the different environment and different 

business model of an investment adviser and how they interact 

with customers, they made the assumption that the cost would essentially be the same to look at investment adviser compliance as 

it would be for broker-dealer compliance. 

Our evaluation from the way we approach risk-based exams and 

the like again was very different from theirs. So our conclusions 

were start-up costs that were trivial compared to what they suggested and annual costs that were less than one-third of what they 

suggested. 

Chairman BACHUS. All right. Commissioner Morgan, I understand Texas does have a robust examination process, but Georgia, 

Minnesota, West Virginia, and Michigan have no examinations 

whatsoever, no on-site examinations. And I am being told that New 

York doesn’t even have an exam program. But I do understand, I 

acknowledge you all are doing a good job, and I think that there 

ought to be—particularly if it was a de minimis fee, and I am not 

saying an amount—but something that the States could be satisfied with, or maybe some credit for States which have a vigorous 

program. 

But I would like to work with you further and explore with 

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20 

holders, including Mr. Tittsworth, that you all continue to pursue 

this, because obviously if there can be some agreement among 

yourselves, it would be, I think, obviously more desirable and beneficial than the Congress simply dictating something. 

I know that Joe Borg, the director of the Alabama Securities 

Commission, has some concerns about coordination. I think all the 

Members, both Republican and Democrat, are sensitive to the cost 

to investment advisers, because all else being said, I think it is like 

with any other thing: 95 percent of the people, 98 percent of the 

people are doing nothing wrong except serving their members, and 

there are always a few bad actors, unfortunately. That is why you 

have to have enforcement of some kind. 

Mr. MORGAN. NASAA would be happy to work with the committee on the issue relating to the very small number of States. 

Chairman BACHUS. And I don’t know if you know, but I was one 

of the ones who advocated expanding State jurisdiction and going 

up on that, giving you more jurisdiction. And although you all— 

Texas has a lot of money, like North Dakota, but there are States 

that are not funding anywhere near the level that Texas is. 

But my time has expired. 

Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I would like to direct a question to Mr. David Tittsworth, executive director and executive vice president, Investment Adviser Association. There has been a lot of discussion of the cost of a user 

fee approach to investment adviser regulation versus establishing 

this self-regulatory organization. I know that the organization commissioned one study by the Boston Consulting Group, and FINRA 

has its own competing study. 

So let us just put aside the cost here for a moment. Independent 

of cost, why does your organization support a user fee model rather 

than an SRO model? I think that in the testimony, you described 

some of this, and I want to make sure that I understand why there 

would be any consideration—this particular legislation—in establishing the SROs that would have some oversight, I suppose, with 

the States, and that businesses, particularly concerned about small 

businesses, would be paying maybe a registration fee to the State 

and then to the SRO. Dodd-Frank, I think, basically did—allowed 

us to raise the threshold for these small businesses from $25 million to, I think, about $100 million, and it seems as if the States 

would be able to handle that adequately without an SRO. So explain to me, why does your organization basically support a user 

fee model rather than this SRO model? 

Mr. TITTSWORTH. Thank you, Ms. Waters. 

We do support appropriate user fee legislation because it would 

be the most direct, the most efficient, and the most effective way 

to enhance investment adviser oversight. 

And I might add, an appropriate user fee provision, in our view, 

would have several elements. It should be in lieu of an SRO. Investment advisers should not have to pay both the SEC user fees 

and an SRO. It should be absolutely dedicated to an enhanced level 

of oversight, so it would be something in addition to the SEC’s current, baseline level. And you would have to have a review mechaVerDate Nov 24 2008 12:09 Feb 15, 2013 Jkt 076103 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\76103.TXT TERRI
21 

nism so that all of you, and us, and the public can measure whether or not the SEC is using this money for the intended purposes. 

Ms. WATERS. I am not sure whether you are actually aware that 

I am drafting legislation that would allow the SEC to collect user 

fees to enable the examination of investment advisers. I don’t know 

if you have had an opportunity to look at the draft that we are putting together and whether or not you have any suggestions for 

making sure that we are accomplishing exactly what Dodd-Frank 

basically recommended. Have you taken a look at that? 

Mr. TITTSWORTH. Yes, ma’am. I appreciate your efforts and we 

would be happy to continue our discussions and would love to support an appropriate user fee provision. 

Ms. WATERS. Thank you, Mr. Chairman. I have no additional 

questions. I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. I yield 30 seconds to 

the chairman. 

Chairman BACHUS. Thank you. 

Ranking Member Frank mentioned JPMorgan and the $2 billion 

loss, but let me put that in perspective. No public member investor 

or taxpayer lost a dime. Madoff was $46 billion, and yet we choose 

to talk about JPMorgan. Sanford was $8 billion, 4 times as much 

loss, but, again, it was investors’ money, it was people’s pension 

funds. 

This JPMorgan loss of their own money, which represented about 

$1 out of every $1,000 that they have as assets, I think is motivated principally by people wanting more regulations on all the 

regulations we have. That is why we keep hearing about 

JPMorgan. I think there is an agenda there. 

But no taxpayer money, no member of the public loss money. We 

ought to be more concerned about Solyndra and that $500 million 

of total loss that was taxpayer money. I am concerned about taxpayers and investors. I am not concerned about an individual or 

companies losing their own money as long as it doesn’t jeopardize 

the system, and it is quite a stretch to continue to talk about that 

as any threat to our bank— 

Ms. WATERS. Would the gentleman yield? 

Chairman BACHUS. Mrs. Biggert? 

Mrs. BIGGERT. Reclaiming my time, because I do have questions. 

I have heard from a number of small advisory firms in my district that they fear that if they are regulated by an SRO, they will 

be subject to costly new regulations and fees that could put them 

out of business, and then there are fewer jobs, and no job creation. 

The objective of H.R. 4624 is to increase investor protection by 

increasing the frequency of exams of investment advisers. It is an 

important objective, but it is equally as important that we strike 

the right balance so that small advisory firms are not disproportionately affected. 

This question is for Mr. Tittsworth. You seem to be in the hot 

seat today. It is my understanding that SROs like FINRA are not 

required to go through a formal rulemaking process, unlike Federal 

regulators, and also don’t conduct any meaningful economic analysis of rules. And like the Consumer Financial Protection Bureau, 

22 

SROs are not regulators subject to appropriations or directly and 

regularly accountable to Congress. Would it make sense to require 

SROs to conduct a more robust cost-benefit analysis on rulemaking? 

Mr. TITTSWORTH. Absolutely, Ms. Biggert. And I believe in H.R. 

4624, there is a very meager swipe at that issue. But from our 

reading of it, it does not require FINRA or an SRO to conduct a 

cost-benefit analysis. And most importantly, our reading is that 

there is no remedy in case the SRO does not conduct an appropriate cost-benefit analysis. So you can sue the SEC, and they have 

been sued in court, for lack of a cost-benefit analysis, but I don’t 

think under the legislation, at least as we read it, that you would 

have that option with FINRA or an SRO. 

Mrs. BIGGERT. Okay. Would it be possible to achieve the goals of 

H.R. 4624 by allowing an SRO like FINRA to have a targeted set 

of authorities to examine investment advisers and enforce SEC-promulgated rules? 

Mr. TITTSWORTH. I think deleting the rulemaking authority for 

an SRO from the bill would be an improvement because that would 

certainly mitigate the opportunity to have a different set of regulations than the SEC. But I think there are still drawbacks, and part 

of that is an examination program should inform regulatory policies. So I don’t think it would be good to separate those two functions and put them in two different entities. 

And at any rate, the SEC is going to bear significant costs in 

overseeing FINRA, and I think that is a point that may be lost in 

this whole debate. But the SEC is being criticized for not doing 

enough to oversee FINRA, and this bill would require even greater 

expenditure to achieve that. 

Mrs. BIGGERT. Having the SEC-promulgated rules, would this 

provide firms, especially the small advisory firms, some certainty 

and transparency and cost-benefit analysis in their rulemaking 

while increasing oversight of the investment advisers? 

Mr. TITTSWORTH. Yes. Having one set of rules is always most desirable in terms of having regulatory certainty. 

Mrs. BIGGERT. I think maybe you answered this: How do we address small advisory firms’ concerns about costly fees that could result from the bill? 

Mr. TITTSWORTH. We would propose that a user fee approach 

would be much less costly, whether it is for small businesses or 

other investment advisers. 

Mrs. BIGGERT. All right, then, Mr. Morgan, is H.R. 4624 clear 

about which entity, the SEC or an SRO, would conduct audits of 

State regulators’ exams of investment advisers? 

Mr. MORGAN. It appears that it contemplates that an SRO would 

do it, but it is NASAA’s position that we should be excluded from 

this altogether for the reasons that I stated. 

Mrs. BIGGERT. Doesn’t the bill require State security regulators 

to report annually to a private-sector entity such as SROs? 

Mr. MORGAN. Yes, it does require that. 

Mrs. BIGGERT. And I have heard that the bill would then delegate to an SRO the authority to oversee States, and there are State 

sovereignty and constitutional concerns. 

23 

Mr. MORGAN. There has been an argument made about the constitutionality of that, and from NASAA’s perspective it seems completely inappropriate. The State is reporting to a private entity. It 

is being required to disclose its exam methodology. The SRO is allowed to comment on that plan, and this would not be a disinterested party that would be commenting on the plan. 

Mrs. BIGGERT. Given these concerns, should the bill make clear 

that the SEC, a Federal agency, should be tasked with the function 

of oversight of State security regulators’ regulation of investment 

advisers? 

Mr. MORGAN. The States would have that authority. It shouldn’t 

be the other way around where the States are reporting to the 

SRO. 

Mrs. BIGGERT. All right. Thank you. I yield back. 

Chairman BACHUS. Mrs. Maloney? 

Mrs. MALONEY. Thank you very much. I would first like to thank 

all the panelists for their testimony. 

And I would like to ask Mr. Ketchum and Mr. Brown to respond 

to Mr. Tittsworth’s statement that the bill inappropriately targets 

small businesses with additional costs and regulations. It would 

seem to me that we would want to share the burden. But if the bill 

apparently exempts large investment advisers, it also exempts certain advisers based on the size of institutional assets, and it appears to allow them to choose one regulator over another, which I 

don’t feel is a good policy, because I think you should have one regulator. 

But I am concerned about inappropriately putting the burden of 

the cost on the small businesses, and my question is directed in 

that area, but also why are these other areas—there are three or 

four areas that are exempted, and what is the policy reason for exempting large institutions over smaller institutions? It just seems 

unfair. 

But Mr. Ketchum first, then Mr. Brown, and, Mr. Tittsworth, if 

you would like to respond, as well? 

Mr. KETCHUM. Sure, Congresswoman. Let me respond to both of 

your questions. 

First, from the standpoint of small advisers, as I indicated in my 

opening statement, with respect to small advisers and the particular concern that Mr. Morgan articulates very well, with respect 

to any State program that meets the requirements to have an active examination program, we would entirely support an amendment that any SRO fee be de minimis, certainly with respect to any 

entity that does not have serious compliance problems, entirely 

supportive. 

I would note, as I said before, that over 1,700 members of our 

less than 5,000 members pay less than $1,000 in fees to FINRA. 

We would support a de minimis standard. 

Secondly was your concern about— 

Mrs. MALONEY. Do you support the exemptions, that larger firms 

should be exempt? 

Mr. KETCHUM. I did want to address that as well. First a clarification. I don’t—certainly my reading of the bill does not exempt 

large investment advisers. It provides exemptions for those advisers that provide advice to mutual funds or unregistered funds, and 

24 

it provides exemptions with respect to entities that are predominantly providing advice to institutional investors. 

My experience from— 

Mrs. MALONEY. So they are exempted, correct? They are exempted. 

Mr. KETCHUM. —working at a large firm is that indeed the customer retail-facing side of the business that provides investment 

advice for retail investors, still very large, is combined with the 

broker-dealer in an entirely separate corporation. I do agree there 

is a potential that the exemptions are too broad now. I appreciate 

the point you made and that Chairman Bachus made. We would 

be pleased to work with the committee to ensure that the exemptions don’t result in customer-facing large investment advisers 

being outside. 

Mrs. MALONEY. Also the ability to choose your regulator. 

Mr. KETCHUM. That would be one possible way to address this. 

With respect to the holding company exemptions that are built 

into here, there is a specific inability for the SEC to determine that 

it inappropriately exempts an entity or a related entity in a company. 

Mrs. MALONEY. It seems like we might legislate that. Why do we 

have to rely on the SEC? 

Mr. Brown, do you have any comments on that? 

Mr. BROWN. Thank you for the opportunity. 

Two quick thoughts on the issue of choosing another regulator. 

We have seen a trend in the industry for years of that already happening because of the disparity between the frequency of exec 

exams of RIAs both at the State and Federal level and the frequency of examination on the broker-dealer side. We certainly 

wouldn’t want to support new legislation that would accelerate 

that, so we would expect to work with the committee to address 

that legitimate concern. 

I agree with Mr. Ketchum we need to take a look at the exemptions, the support, the intent to make sure that this increases examinations for retail investment advisers. They are the ones that 

don’t have frequent enough examinations. The SEC, in my understanding, is already rigorously examining institutional advisers, 

mutual funds, etc., and we support working with the committee to 

identify the right balance on the exemptions so we close the regulatory— 

Mrs. MALONEY. It seems to me that if we are going to have the 

right balance, everybody should bear the burden somewhat. Why 

should someone not have to pay the fee if there is going to be a 

fee to support this to FINRA or the SEC? 

I would like to ask a question about transparency, since really 

the heart of the whole Dodd-Frank bill was to bring sunlight into 

transactions. There have been some transparency concerns that 

were raised by people because FINRA rules are not subject to the 

Administrative Procedures Act (APA), which requires the standard 

notice-and-comment period, which is very important in—really in 

the House of Representatives, and regulated members have little 

insight as to how FINRA makes regulatory decisions. So I am concerned about the transparency, and I would like to see if Mr. 

25 

Tittsworth would like to talk about the transparency challenge, and 

really anyone else. 

Chairman BACHUS. We are over the time, but if you have a 10- 

or 20-second response, Mr. Tittsworth, you may give it. 

Mr. TITTSWORTH. Ms. Maloney, I think that the Project on Government Oversight letter that was produced last week, and that I 

believe was introduced into the record earlier today, would provide 

a very sound response to your question about transparency. It is 

an important question. 

Mr. KETCHUM. Congresswoman Maloney, let me just clarify that, 

in fact, all FINRA rules get published—or all substantive ones get 

published twice for comment. We publish once generally before we 

file with the SEC, and then it is published again by the SEC, and 

the SEC must approve it. So while not subject to the Administrative Procedures Act, it is subject to provisions that require public 

comment, require specific findings of the SEC, including findings 

that can relate to costs and benefits, and this bill even provides 

greater clarity with respect to the SEC’s responsibilities. 

Chairman BACHUS. Thank you. 

Mr. Garrett? 

Mr. GARRETT. I thank the chairman and the panel. 

Just a couple of questions actually, and the first question goes 

to the whole panel, but I think I will start with Mr. Ketchum. 

It is my understanding that as current law states, there is no— 

and Mr. Tittsworth touched on this—requirement under law for a 

cost-benefit analysis to be done by FINRA, although obviously the 

regulations that you just set out of the procedure to go through 

may very well have a significant impact upon the economy, and 

also the member companies as well. And as you know, I have a 

piece of legislation that would do this for the SEC. 

So I would ask you, is this an appropriate time, then, in any legislation—whether it is this bill, modify this bill or some other bill— 

to include that in the statute? 

Mr. KETCHUM. I think it is certainly an appropriate time to clarify the self-regulatory organizations’ responsibility to both focus on 

costs, measure that versus benefits, evaluate alternatives, and for 

the SEC to evaluate that clearly with respect to their review. I 

think the SEC has been pretty clear lately that is how they approach even our rules with respect to our existing self-regulatory 

organizations. I think this bill is even clearer, and I view it entirely 

as our responsibility to look at those and to carefully evaluate alternatives that may have lesser costs. 

Mr. GARRETT. Would any other member of the panel like to 

chime in there on the necessity in statute form for this? 

Mr. TITTSWORTH. If I may, Mr. Garrett? 

Mr. GARRETT. Sure. 

Mr. TITTSWORTH. I apologize for dominating the discussion here, 

but, again, our reading of H.R. 4624 is that it does not require 

FINRA to conduct a cost-benefit analysis. And there is certainly no 

remedy other than maybe the SEC taking FINRA to task if they 

don’t do the analysis. 

Mr. GARRETT. Okay. Thank you. 

Aside from that one issue that I sort of harp on all the time, this 

is for the rest of the panel as well, the bill does go into some preVerDate Nov 24 2008 12:09 Feb 15, 2013 Jkt 076103 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\76103.TXT TERRI
26 

scriptive—I will use the words ‘‘prescriptive language’’ as to what 

the SEC can do—look at as far as whatever the SRO would be 

going forward. Is that list exhaustive enough or too exhaustive? Is 

there something else? Should the legislation be more prescriptive 

or less prescriptive with regard to a potential new SRO? 

Mr. HELCK. We pointed out in our comments that we felt like the 

rules should be extended to amend the 1934 Act and apply to 

FINRA so that there would be a requirement for transparency and 

cost-benefit analysis that would be consistent among all providers, 

and therefore broker-dealers should be affected by that as well as 

investment advisers. 

Mr. GARRETT. Okay. Mr. Brown? 

Mr. BROWN. Two quick comments. First, we would agree with extending the provisions to the broker-dealer side of FINRA. And second, we have supported your legislation that you have put forth to 

require regulatory reform in a cost-benefit analysis. That is appropriate. 

Mr. GARRETT. Thank you. 

I will end with Mr. Tittsworth on just two points. First of all, 

what is the percentage of investment advisers who are stand-alone 

or investment advisers who are tied with a broker-dealer? 

Mr. TITTSWORTH. I believe out of the 12,000 currently registered 

advisers, which as you know will soon drop to around 2,600, that 

2,700 are affiliated. That would include 580 dually registered firms. 

I believe that is in the ballpark. 

Mr. GARRETT. And is there—so for the percentage of them that 

are already under FINRA that—at least the broker-dealer section 

of them are, right? How would that work, in your mind, if just for 

that segment of the marketplace that they would be subject to a 

version of this bill, that they would be required to have an SRO, 

whether it be FINRA or otherwise, required for dealing with them, 

since they are already having the audits, as someone else testified 

here about? 

Mr. TITTSWORTH. I think there is a difference between dually 

registered firms, and I know some of the members of this panel 

have opposed the dually registered firms going to FINRA as well. 

FINRA would support that. But there is a difference between just 

being affiliated. You can have an investment adviser that is an advisory shop, a mutual fund company, for example, that has a limited-purpose broker-dealer for distribution purposes only, and I 

would submit to you, Mr. Garrett, that is much different than a 

firm that is consolidated and markets both functions actively. 

Mr. GARRETT. Does anybody else want to chime in on that general topic? 

And for that smaller category of—and I see my time is up—for 

the smaller category that actually—not just has an affinity to it— 

how would that work for them? 

Mr. TITTSWORTH. For the dually registered firms? 

Mr. GARRETT. Yes. 

Mr. TITTSWORTH. There could be legislation that would subject 

dually registered firms to SRO oversight or FINRA oversight. 

Mr. GARRETT. And your thoughts on that? 

Mr. TITTSWORTH. I think that would be a better approach than 

H.R. 4624. I still think user fees would be a better approach. 

27 

Mr. GARRETT. Did you support user fees when the whole DoddFrank legislation was coming through the process? 

Mr. TITTSWORTH. We didn’t support that specific provision. The 

fact that it was an open-ended authority would be my main objection to the way that particular provision was in the House version. 

There was also a self-funding mechanism in appropriations. 

Mr. GARRETT. Okay. Thank you. I yield back. 

Chairman BACHUS. Let me direct all the Members to page 19 of 

the legislation that we have drafted. On this cost-benefit analysis, 

it says that the Commission, meaning the SEC, before they make 

a decision on how the national investor adviser association, whether it be FINRA or someone else, that they will include from the industry and consumer groups concerning the potential cost or benefits of the proposed rule or the proposed rule change and provide 

a response to those comments in its public filing with the Commission. In other words, if it is FINRA, the cost-benefit from all groups 

will be included. FINRA will be required to make a response to 

those. 

And it goes on to say that response, whether it is from FINRA 

or someone else, will include why they are adopting those suggestions or why they are not adopting those suggestions on cost-benefit analysis. So whomever is designated will be required to say 

why they are adopting those cost-benefit recommendations or rejecting them; and further, the reasons—if they reject them, the reasons they reject those specific cost-benefit suggestions or—so Mr. 

Tittsworth’s group could say, we want to you do this. If it is 

FINRA, they could say, we don’t want to do this, and here are the 

reasons. And then, the Commission would make a decision on 

whether or not they would have to adopt them. 

Now, if that is not tight enough, I think we would all be willing 

to work for some other language, but I think that is—certainly that 

is asking for a cost-benefit analysis of all parties, not just FINRA 

or the SEC, but for the industry groups and consumer groups to 

offer their cost-benefit analysis, and for the Commission to either 

adopt them or reject them, and for the SRO to either say they 

would be willing to do that or would not be willing to do that. So 

we can continue to work on this. 

Mr. Meeks? 

Mr. MEEKS. Thank you, Mr. Chairman. 

I felt compelled to come down. I was listening to the hearing, and 

I heard Ranking Member Barney Frank’s comment about 

JPMorgan’s loss and Chairman Bachus’ spot about protecting taxpayers from that loss. And I have to completely agree with Congressman Frank’s comment. I think he was absolutely on target. When you think about it, we are spending more than $1 billion a week, $1 billion a week, to control marketplaces in Kabul, and 

no one has a problem, particularly my colleagues across the aisle, 

with that. You have no problem with that. But when it comes to 

protecting our investors and patrolling our securities markets, it 

seems as though all of a sudden, my colleagues on the other side 

become Scrooges. 

The bill, as I have read it, seems to employ a convoluted and circular reasoning that I don’t really understand. If you starve the 

SEC from funding, I don’t know how they can be successful. And 

28 

the bill lacks—the SEC lacks adequate resources, and thus the 

agency is unable to conduct comprehensive oversight of the investment adviser community on an annual basis. And then you starve 

the beast, and then so you say, let us outsource it. It just doesn’t 

make sense to me. 

And I have, Mr. Chairman, a report that was made by the U.S. 

Chamber of Commerce’s Center for Capital Markets and Competitiveness, which has taken a look at nongovernmental organizations. I ask unanimous consent to submit that report for the record. 

Chairman BACHUS. Sure. Is that the report that came out about 

13 months ago? 

Mr. MEEKS. That is correct. 

Chairman BACHUS. Without objection, it is so ordered. 

Mr. MEEKS. And I ask Mr. Tittsworth whether or not you had 

an opportunity to see this report? 

Mr. TITTSWORTH. Yes, Congressman. 

Chairman BACHUS. He actually testified about it in his opening 

statement. 

Mr. MEEKS. And what would you say or what does the report say 

about the accountability of such organizations? 

Mr. TITTSWORTH. Congressman Meeks, the U.S. Chamber of 

Commerce report indicates that the accountability of nongovernmental regulators, and FINRA in particular, is lacking. 

Mr. MEEKS. And I also would ask whether or not you are familiar with a brief summary from the Cato Institute that was given? 

Mr. TITTSWORTH. Yes, sir. There was a brief that the Cato Institute filed in December of last year with the U.S. Supreme Court 

in a case against FINRA. 

Mr. MEEKS. Mr. Chairman, I also ask unanimous consent to include the Cato briefing as part of the hearing record. 

Chairman BACHUS. Yes. We are actually operating on a rule that 

any Member can offer any evidence or documents they wish in support of their comments. 

Mr. MEEKS. Thank you. 

Mr. Tittsworth, I was wondering whether you can give us a brief 

summary of Cato’s arguments? 

Mr. TITTSWORTH. Yes, Mr. Meeks. And I would suggest to members of the committee that if you haven’t read this amicus brief the 

Cato Institute filed in December, it would be very instructive to the 

issues that the committee is considering today. 

The Cato Institute basically talks about the lack of accountability 

and transparency with FINRA, and that no one has ever overseen 

their budget, executive compensation, biased arbitration system, 

and many other issues. 

Mr. MEEKS. And finally, Mr. Tittsworth, and I have just been 

looking, but a Republican, Mr. Paul Atkins, who previously served 

as an SEC Commissioner, testified before this committee last fall. 

He included in his opinions the subject of FINRA serving as an 

SRO for advisers, and he said, ‘‘Perhaps most concerning is the 

lack of transparency. While FINRA and other SROs can enact 

rulemakings that carry the force of law, they are not subject to the 

Administrative Procedures Act, Freedom of Information Act requests, and are not required to conduct any cost-benefit analyses. 

The disciplinary process raises due process concerns. Its board 

29 

meetings are private and not subject to the Sunshine Act, of course. 

This lack of transparency and accountability to either the SEC, its 

members, or the public is a real concern underlying the present 

discussion over delegating authority to oversee investment advisers. I must raise serious concerns regarding expanding FINRA’s 

empire without a fundamental reevaluation of its statutory functions and organization.’’ 

What do you think about that position; do you agree or disagree? 

Mr. TITTSWORTH. I certainly agree. 

Chairman BACHUS. You have time for a 10-second response. 

Mr. TITTSWORTH. I agree with it, Congressman. 

Chairman BACHUS. That is even better. 

Mr. Neugebauer? 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

When I was listening to the testimony of the panel today, basically I think there is a common theme here, and I will just kind 

of go down the row here. But I think, Mr. Brown, you said that currently, you don’t think the SEC is doing an adequate job in overseeing investment advisers? Is that a yes or a no? 

Mr. BROWN. Yes. 

Mr. NEUGEBAUER. I am sorry? 

Mr. BROWN. Yes, sir, that is correct. 

Mr. NEUGEBAUER. And, Mr Currey, would you say they are not 

doing an adequate job? 

Mr. CURREY. It appears so. 

Mr. HELCK. I agree. 

Mr. TITTSWORTH. I also agree. 

Mr. NEUGEBAUER. So I am listening, and one of those kind of a 

common theme in Washington, and that is when we have a regulator that is not doing their job, we go create another regulator. 

And I respect what the chairman is trying to do. Everybody agrees 

that the SEC is not doing their job, so he is trying to introduce or 

has introduced an idea. 

I think the thing that troubles me is that when we—people 

brought up Mr. Madoff and Stanford. Again, that was the result of 

a regulator not doing their job. On several occasions, we have had 

hearings on both of those issues, and we brought to people’s attention within those agencies that there was a problem, and the regulator, unfortunately, ignored that. 

And so what I am trying to get my arms around is, when are we 

going to just start holding the regulators accountable and making 

sure they are doing their job rather than creating new regulations 

and new regulators? Because what we—in many cases, that is how 

we ended up with Dodd-Frank is rather than go back and identify 

where there was regulatory failure, we just threw a big whole new 

blanket of regulations and new regulators over the entire financial 

market. And so, I am trying to get my arms around how creating 

another regulator fixes the problem if we are not holding regulators 

accountable that currently have that responsibility? 

Mr. Brown, do you want to take a shot at that? 

Mr. BROWN. That is a great question. Thank you very much. 

I think this bill creates an opportunity to do just that, to start 

holding FINRA more accountable. I am not sure I agree with the 

framing that it is creating a new regulator. It is leveraging the 

30 

benefits of an existing regulatory body to expand and to address an 

important investor protection concern, and that is inadequate frequency of IA exams. 

Mr. NEUGEBAUER. Mr. Currey? 

Mr. CURREY. Thank you. 

From our standpoint—I am a practitioner. I am a guy who sees 

people on a day-to-day basis and does this kind of business on the 

street. And so from my members’ perspective and my perspective, 

we don’t get up every day looking for a new cupful of regulations 

from our neighbors. We feel like we have a gracious plenty of regulation now and then some in most cases. 

The thing we want to avoid, though, for our members, is being 

subject to two regulators. And so, we would like to see this combined into one regulatory body with maybe two sets of rules that 

they can coordinate so that we can consolidate those examination 

processes and keep the costs to our members and their clients 

down to a bare minimum. So I think that speaks to FINRA as the 

choice for us. 

Mr. NEUGEBAUER. Thank you. 

Mr. HELCK. Yes, sir, I would agree with that. We are not looking 

for more regulators either; we are looking for consistency among all 

providers of the same services. And if one of the choices is to create 

a new regulator, then that would be problematic. If we have one 

regulator that can consistently apply the same high standards, I 

think we have accomplished what we came here to do. 

Mr. NEUGEBAUER. Mr. Ketchum? 

Mr. KETCHUM. I am just reiterating what has been said. FINRA 

provides oversight with respect to broker-dealer members that are 

either part of the same corporation or affiliated with 87 percent of 

the human beings who are registered as investment advisers. We 

can provide that service effectively at their cost, and I agree with 

you, we should do that in a way that does not inappropriately expand regulation. 

Mr. NEUGEBAUER. Mr. Morgan? 

Mr. MORGAN. Congressman, that is exactly the point NASAA is 

making. You are creating a new regulator for the States that are 

doing the job, and we need to be excluded from this. 

Mr. NEUGEBAUER. Mr. Tittsworth? 

Mr. TITTSWORTH. I agree that creating a new regulator is unnecessary. I don’t have an answer, Congressman, for how you hold regulators accountable, and I understand your frustration with that. 

Mr. NEUGEBAUER. I thank the chairman, and I would note that 

I finished on time, too. 

Chairman BACHUS. We have an Oversight Subcommittee that is 

holding them accountable, I think, every day, and doing a good job. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Chairman Bachus. 

As I said in my opening remarks, I am concerned about the effects of this legislation on the smallest advisers. These are small 

businesses that serve the middle class with investments of, let us 

say, $500,000 or less, and we need to ensure that additional fees 

do not put them out of business. 

31 

My first question is to Mr. Tittsworth. Will State-registered investment advisers be subject to the same membership fees even if 

they are already registered and examined by their States? 

Mr. TITTSWORTH. Yes, sir. As we read H.R. 4624, all State-registered advisers would have to belong to an SRO. 

Mr. HINOJOSA. My next question would be to John Morgan, the 

securities commissioner of Texas. What sort of pros and cons does 

this legislation hold for the advisers who are working with large investors of $750,000 or more? 

Mr. MORGAN. The jurisdiction has been divided $100 million or 

less assets under management or subject to State regulation, and 

are regulated in Texas by the State Securities Board. 

Mr. HINOJOSA. So if it is $1 million or more that they are advising, could they do a better job by passing this legislation? 

Mr. MORGAN. No, not with respect to the regulation by Texas and 

the vast majority of other States that are already doing the job. 

What is being proposed is a duplicate layer of regulation, and the 

fees, the membership fees, are just part of the cost. The ongoing 

compliance costs would be substantial as well. 

Mr. HINOJOSA. I have to agree with you, and I think that this 

legislation is not necessary, and I believe that we ought to take a 

look at the SEC and maybe strengthen their position to oversee 

them. 

So with that, I yield back, Mr. Chairman. 

Mr. MCHENRY [presiding]. We will now go to Mr. Posey for 5 

minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. And I compliment Chairman Bachus and Ms. McCarthy on their good intentions to protect investors. I assume that the advisers mostly fear 

overregulation by the Consumer Financial Protection Bureau, and 

this is maybe a step that might insulate you a little bit from that. 

I don’t think it will do that. I think you will just have two people 

overregulating you rather than one. 

But I don’t believe shifting an unfunded mandate, a burden onto 

the States, is a correct answer. More laws, rules, regulations, more 

employees and more costs is not going to solve the problem, as we 

have seen evidenced by Madoff’s caper, for example. Madoff’s caper 

was not caused by any lack of laws, rules or Federal employees; it 

was caused by a lack of employees who were willing to do their 

jobs. We had 20-something examiners and 30-something investigators, or vice versa, whatever the numbers are, who just failed to 

do their jobs. I don’t know what they are doing now, but they are 

the ones who empowered Madoff, not a lack of laws. 

It appears that the SEC, who is empowered to oversee interstate 

regulation of securities and things, does not want to do their work 

and sees this as a great opportunity to shift burden onto the 

States, an unfunded burden, I might add, which is not the responsibility of the States, ostensibly because the SEC has too much 

work to do and can’t afford to do anything else. 

But we know they have 1,200 lawyers at the SEC, who file an 

average of one case a year. I know a lot of lawyers who would like 

to have a heavy caseload like that. We know they squandered millions and millions of dollars on unused office space. And so, the 

question that begs for an answer is not how much money they 

32 

waste or how much money they spend, but what do they actually 

do? 

We know how much money they spend. Certainly, that is not a 

measure of quality or performance. What do they actually do to 

protect the public, which is their number one job, and not employees who don’t do their job? 

Mr. Chairman, to put this in the proper perspective, and if there 

are no objections, I would like to ask the SEC to tell us what they 

do. I would like the SEC to give us a one-page summary, and at 

the top of the page, I would like the SEC to state all the money 

that came through the SEC—reversions, credits, budget items, fees 

collected, penalties—and then I would like them to list on one page 

what they actually do, and how many times they do it, and then 

the cost of doing each function each time, and those lists of things 

should add up to the total amount of money that runs through the 

agency. 

And then, Mr. Chairman, when I see what the SEC actually does 

and what it actually costs to do what they say they actually do, I 

think we will be put in a whole lot better position to determine how 

we are going to move forward with allocating resources for enforcement. But I don’t think at this time we should waste a whole lot 

of time, and a whole lot of energy, or a whole lot of taxpayers’ 

money trying to invent a wheel, particularly a wheel that is already broken. 

I yield back, Mr. Chairman. 

Mr. MCHENRY. I thank you, and I will now recognize Ms. McCarthy for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. I just want to ask you a quick 

question. Does your organization have in place a compliance database accessibility and searchable by an investor that includes the 

State-by-State information on registered investment advisers, the 

examination process, and the disciplinary action that has been 

taken on the individuals in the firms? 

Mr. MORGAN. We have access to the CRB database that has information and the IARD database that has information. 

Mrs. MCCARTHY OF NEW YORK. So that is for all the States? 

Mr. MORGAN. Correct. 

Mrs. MCCARTHY OF NEW YORK. Has that been updated recently? 

Mr. MORGAN. Yes. 

Mrs. MCCARTHY OF NEW YORK. Because I know about 2 years 

ago or 3 years ago, we had asked for that information, and you 

didn’t have it. 

Okay. Mr. Tittsworth, what is the examination frequency of your 

members who are subject to SEC regulation and oversight? And 

has there been an increase or decrease in examinations since the 

financial crisis? 

Mr. TITTSWORTH. I do not know, Congresswoman, other than the 

statistics that have been thrown around here today, 8 percent of 

all SEC-registered advisers in 2011, representing 30 percent of the 

total assets under management. 

Mrs. MCCARTHY OF NEW YORK. Could you send that to me in 

written form, then, when have you that information? 

Mr. TITTSWORTH. Sure. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

33 

And one more. Mr. Ketchum, there have been criticisms of the 

SROs’ role in coordination with State authority for those States 

that satisfies the examination requirements under the bill. Can you 

explain again what you would anticipate the role of the SRO to be, 

and how the coordination will be achieved with individual State authorities when necessary? 

Mr. KETCHUM. Thank you, Congresswoman. 

First, let me say that since I became CEO of FINRA some 3 

years ago, I have made it a major priority to include the coordination and common working efforts with respect to NASAA. As an example, this year there have been 103 access requests made to us 

on our existing self-regulatory side from the States. We have provided information back on all 103 access requests. 

We have tried to take as aggressive as possible an interpretation 

and reading with respect to concerns we previously had with respect to what is referred to as the State actor position. I will note 

that this legislation specifically addresses and provides far greater 

comfort on the appropriateness of interaction between the SRO and 

the provision of data and consultation than exists on the Exchange 

Act side, and I am delighted to see that. 

I would finally note that with respect to the annual meetings 

that occur that are built into the legislation, we view this just as 

we have always viewed the SEC’s annual 19(d) meetings on the 

broker-dealer side as purely collegial and an opportunity to share 

information. To the extent there are any concerns the States have 

with respect to our role, we would certainly be glad to work with 

them with respect to clarifying that in the legislation. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Mr. Helck, one criticism we have heard a number of times today, 

and also before today, is the potential for regulatory arbitrage of 

the examination process as a result of the enhanced oversight and 

examinations by an SRO. You had mentioned a few things, but 

what are your thoughts on that, and what suggestions do you have 

that would further enhance the cooperation between the SEC and 

the SRO beyond what is currently in the bill? 

Mr. HELCK. I thought your first question was very insightful, and 

it goes right to that very point. The CRD, which FINRA administers, is a record of all registered persons in the securities world, 

and it contains their licensing, their disciplinary history, and all 

the relative data. It is publicly available. And therefore, it gives the 

public the ability to monitor and have transparency into the 

records of their adviser. 

There is no similar kind of infrastructure in place for the people 

involved in the registered investment advisory world, so therefore, 

it goes to the differences and therefore inconsistencies of being able 

to establish and track at the same level. I think it would be useful 

for us to have consistent records on participants providing services 

across the industry and all the various regulatory regimes that 

they are operating. 

Mrs. MCCARTHY OF NEW YORK. I agree. With that, I yield back 

the balance of my time. 

Mr. MCHENRY. I thank the gentlelady for yielding back. Mr. 

Luetkemeyer for 5 minutes. 

34 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I thank the gentlemen for being here this morning. I have some questions here 

that keep coming to my mind as I listen to Mr. Neugebauer, and 

Mr. Posey, in particular. Can you give me an explanation on what 

you feel over the last 4 years has been the problem with your industry? We have had some scandals and some scams. Was it due 

to the lack of proper rules to protect the consumer? Was it due to 

the lack of enforcement of existing rules? Or was it just the inadequacy and the failings of the regulatory officials to catch those 

things and do due diligence? Mr. Brown, can we go down the line 

here, I just would like to know what your thoughts are on it? 

Mr. BROWN. I think my members would say the biggest single 

challenge they faced in the last 4 years as a result of the financial 

crisis, as a result of Mr. Madoff’s crimes, and Mr. Sanford’s crimes, 

is the undermining of trust. The crimes of a few have painted all 

legitimate industry participants with the same broad brush and it 

undermined trust between client and the adviser. 

Mr. LUETKEMEYER. Okay. The crimes have been committed. 

However, what is the problem there? Was it they just had some 

folks who just are going to go out and do some mischievous things 

here and got away with it and the reason they did was because we 

didn’t have the rules in place to protect the people or the enforcement of existing rules wasn’t there just or the regulators just 

dropped the ball? 

Mr. BROWN. I think it is more the latter. 

Mr. LUETKEMEYER. The regulators dropped the ball. Mr. Currey? 

Mr. CURREY. I have to caution you that I am a big-picture guy, 

so if you get too detailed here, we are going to be in trouble. I 

would say it is a combination of both. Probably, there were some 

regulations that needed to be different, if not additional regulation. 

But greater than that, enforcement is always a problem. It is the 

most expensive end of the thing and probably that is where a good 

deal of the blame lies. 

Mr. LUETKEMEYER. So you believe the enforcement end was the 

problem here? 

Mr. CURREY. Yes. 

Mr. LUETKEMEYER. Mr. Helck? 

Mr. HELCK. I would agree with that. We have good rules and 

laws on all sides of the industry. There are inconsistencies. So 

when we have failings of human beings to either be effective in 

doing their roles or we just have circumstances beyond anyone’s 

control, what we look to are what is the structural framework that 

would have and could have and maybe in the future could be improved to make sure that it doesn’t happen again, so we should 

learn from those mistakes. Consistency, I think we all have stated 

here today, is one of those strategies that would help us achieve 

that. And that is why we think that if we had a consistent policy, 

and therefore oversight and enforcement process, we would be less 

subject to things falling through the cracks as they don’t interface 

well. 

Mr. LUETKEMEYER. Mr. Ketchum? 

Mr. KETCHUM. Congressman, no regulator can be happy with 

what has happened in the last 4 years. Any regulator that hasn’t 

reviewed the way we approach examinations, enforcement, or inVerDate Nov 24 2008 12:09 Feb 15, 2013 Jkt 076103 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\76103.TXT TERRI
35 

vestigations is deficient in not doing so. We have. We think we 

have made changes that are important. I also agree with you, 

speaking on the investment adviser side, that the basic rule and 

statutory environment is excellent. I don’t believe that the need 

here is, in any way, primarily related to rule making. But as a last 

piece, if you don’t examine and if you examine only 8 percent of 

persons, then have you to depend on nothing but enforcement. And 

that probably explains why the SEC has as recently as today 

talked about such a banner year in investment adviser enforcement 

actions. 

Mr. LUETKEMEYER. Thank you. Mr. Morgan? 

Mr. MORGAN. It is important to keep in perspective that this is 

a Federal problem, and all of the examples are Federal issues. And 

not doing the inspections on the cycle that makes sense or that is 

adequate, or following up on information that is provided, that you 

would expect it would follow up on an enforcement investigation. 

These aren’t State problems; the States are doing their job. 

Mr. LUETKEMEYER. Very good. Thank you. Mr. Tittsworth? 

Mr. TITTSWORTH. There is not a lack of regulations. There are 

plenty of laws prohibiting fraud. I don’t know the answer to why 

people continue to commit fraud, Congressman. 

Mr. LUETKEMEYER. My question is by not catching them, is it a 

problem with the rules, a problem with enforcement of the rules or 

is the problem that the regulators aren’t catching anything and 

just being inadequate in their job? 

Mr. TITTSWORTH. I think the regulations are adequate; it is more 

a question of inspections and enforcement. 

Mr. LUETKEMEYER. Okay. So there seems to be a consensus that 

the regulation is the problem. Does this bill solve the problem, yes 

or no? 

Mr. BROWN. It is a tremendous step in the right direction. 

Mr. LUETKEMEYER. Okay. 

Mr. CURREY. As long as it increases and equalizes the examination process across both lines of the business, yes, it does. 

Mr. LUETKEMEYER. Okay. Mr. Helck? 

Mr. HELCK. A good step in the right direction, not far enough. 

Mr. LUETKEMEYER. Okay. Mr. Ketchum? 

Mr. KETCHUM. An environment of increased examinations directly addresses the problem. 

Mr. LUETKEMEYER. Mr. Morgan? 

Mr. MORGAN. Absolutely not. The States are not part of the problem. 

Mr. LUETKEMEYER. Okay. Mr. Tittsworth? 

Mr. TITTSWORTH. I believe I have been clear. We oppose this bill 

and think there is a much better approach. 

Mr. LUETKEMEYER. Thank you. I know this is a comment. I know 

I come from Missouri and we have, our own State does an excellent 

job of this. And I am not sure we need another layer there, but as 

a former regulator myself, I understand what you are talking 

about. And if we have a regulatory problem, we need to solve it 

somehow, some way and get together and make it all work. I thank 

you, Mr. Chairman, for the extra time. 

Mr. MCHENRY. Mr. Scott for 5 minutes. 

36 

Mr. SCOTT. Thank you, sir. It is always good to know to keep 

score, and I just tried to keep score just now. I want to make sure 

I am right about this. Is the score on this among the 6 of you, 4 

to 2 in favor of the legislation, is that correct? All right. That is 

very good. 

Let me start with you, Mr. Currey. You represent a very fine organization, the National Association of Insurance and Financial 

Advisors. I think it is very important for us, particularly as you 

represent financial advisors, to really get your take on this. Tell us 

what you feel are the strong points about this bill, tell us where 

we might be able to improve it, and the concerns that were raised 

by those two who are opposed to that, how might that be addressed? 

Mr. CURREY. I am sorry, the last part again, sir? 

Mr. SCOTT. This is a hearing. They have raised some concerns. 

I think you have heard the two who are opposed to this concern. 

Are they areas in which those can be addressed? But generally, 

what I want to know from you, because you represent the financial 

advisors, is what generally is your take on this? Are we going in 

the right direction, are we doing what needs to be done here to enhance what I feel is the most important thing: investor confidence? 

Is this solving the problem? 

Mr. CURREY. We believe this would certainly go a few steps in 

that direction. We support the bill, of course. I guess we have just 

a couple of things. As I said earlier in response to Mr. Neugebauer, 

we didn’t come looking for new regulation; we have plenty of that 

to go around. But there appears to be consensus or common agreement that there is a gap in regulation, particularly as it applies to 

the investment adviser world. And most of our folks, most of our 

members, are investment adviser representatives, that is, they 

work under a corporate RIA, which is subject already to SEC oversight and regulation. 

And so for us, to consolidate our regulator that we deal with into 

one entity is a very good thing, and we see the chance in this bill 

to do that. We think the appropriate choice in that matter is 

FINRA because they have already have a great regulatory chassis 

established, and we think they would get up to speed on the IAR 

side and the RIA side as well. Sure, there would be two different 

sets of rules, but you would have one regulator coordinating those 

rules and making sure that they got applied equitably across both 

lines of business. 

And the most important thing for our members is we would only 

have one regulator in our face at a time, and that really is important. Examinations could be consolidated. We believe there is a 

way to do that. These are two different lines of business, but they 

are not utterly dissimilar; they are alike in many ways. And we 

think those rules could be consolidated into a single examination. 

The other thing I would say, it is in the bill, of course, that asked 

for field representation. In other words, adviser representation on 

the governing board of any new SRO or governing board that is 

created. And I would suggest that maybe it would be a good idea 

for you guys to think of, too, Mr. Ketchum. We think that field experience, current field experience, knowing how it really goes when 

37 

you are in somebody’s living room or they are in your office, we 

think that is an important part of this. 

Mr. SCOTT. Okay. Thank you very much. Now, I think Mr. Morgan and Mr. Tittsworth, you guys were two of the two who oppose 

the bill, is that correct? Let me ask you, because one of the concerns that was raised by those who had some concerns about it was 

the impact on some of the smaller operators here. So let me ask 

you, because if this bill is enacted, it clearly states that those investment adviser firms with under $100 million in assets would not 

be affected if they are not already covered by State regulations. So 

doesn’t this sort of refute the argument that the expense is prohibitive and would be damaging to the operation of smaller investment 

adviser firms, as was pointed out, I think by one of you, and also 

by Mr. Hinojosa, who is opposed to it. 

Mr. MORGAN. If I might go first, they absolutely would be affected. They would be required to join the SRO, pay the membership fee, and they would be subject to the ongoing compliance costs, 

whatever those are. And for the small firms that I have referred 

to, for example, there are many of these firms with $5 million to 

$10 million in assets under management, if you do the math on 

what they are bringing in, $50,000 to $125,000, it is a small 

amount of money and they have all of the costs that they have to 

run a business. And if you have adequate regulation in place, 

which we have in Texas and in the other States, it is absolutely 

an unnecessary layer of costs, not just initial costs, but the ongoing 

costs that they would have to comply with. It makes no sense. 

Mr. MCHENRY. The gentleman’s time has expired. Mr. Canseco 

is recognized for 5 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman. Mr. Brown, the chart 

in your testimony shows that a lot of the growth in industry reps 

over the next several years will be dual registered reps, and that 

is registered both as broker and also as adviser. So how would this 

legislation make the examination regulation of dual registered reps 

more effective and efficient for everybody involved? 

Mr. BROWN. Thank you for the question. Similar to what Mr. 

Helck has said, it would create a lot more consistency. Two things: 

One, it would create a lot more consistency to have one regulator 

looking at both sides of the business. It would also, as we have said 

over and over here, close the regulatory gap so that those nondual 

registered RIAs, those independent RIAs who are subject to virtually no oversight, they would finally have someone coming in and 

verifying that they are complying with the rules. 

Mr. CANSECO. And ultimately, how would this benefit the client 

of a dual-registered rep? 

Mr. BROWN. Clients want to know that they can trust the person 

they are getting advice from. And a key component of that trust, 

not the only component, but a key component of that trust, is 

knowing that adviser is subject to some ongoing oversight. So I 

think it would do that. 

Mr. CANSECO. It would be good. Do you expect the growth in 

dual-registered reps to continue to grow over the next decade? 

Mr. BROWN. Yes, sir. 

38 

Mr. CANSECO. And if so, would retail investors ultimately benefit 

from a streamlined regulatory regime that has less gaps than it 

does currently? 

Mr. BROWN. Absolutely. 

Mr. CANSECO. So Mr. Brown, we are potentially moving towards 

a scenario where the rules regarding broker-dealers and investment advisers could be harmonized. So what would be the outcome 

of the industry and investors if the regulatory oversight bodies are 

not harmonized as well? 

Mr. BROWN. We have an opportunity to harmonize the rules because the business is now harmonized. The typical investment financial adviser who is affiliated both with a broker-dealer and is 

also registered as an RIA is delivering comprehensive advice, products, and services to the average middle-class investor. This is an 

opportunity to help the regulation and oversight catch up with that 

development in the marketplace. 

Mr. CANSECO. So given that the broker-dealers are already examined much more often than investment advisers, does that constitute a serious inequity between these two professionals? 

Mr. BROWN. Absolutely. 

Mr. CANSECO. If Congress authorized the SEC funding at the 

level they recently requested, which would amount to a budget increase of about $250 million, a report showed they would still only 

be able to examine 11 percent of investment advisers, given that 

we are on the verge of a budget crisis that is increased. Isn’t it possible—so what is the best way to examine advisers that currently 

are not being examined? 

Mr. BROWN. In light of the fact that it is not likely for the SEC’s 

budget to increase, this legislation allows the resources of the industry through FINRA to be leveraged in a most cost-effective 

manner to close the regulatory gap. 

Mr. CANSECO. Thank you, Mr. Brown. So Mr. Ketchum, if FINRA 

were eventually approved by the SEC as the SRO for investment 

advisers, would you expect the fees for firms already examined by 

States to be minimal? 

Mr. KETCHUM. Yes, we would. 

Mr. CANSECO. Did the Boston Consulting Group talk to you or 

any FINRA staff before creating a cost estimate for what an SRO 

for investment advisers would cost? 

Mr. KETCHUM. No, they did not, and their cost estimates are 

widely inflated. 

Mr. CANSECO. All right. Mr. Morgan, do you disagree that the potential costs for State-registered advisers would be minimal? 

Mr. MORGAN. Yes. I don’t know what the costs are. I have heard 

various descriptions of what they might be. But you have, even if 

the membership costs, again, are low, the ongoing compliance costs 

could be significant. And again, with respect to the advisers in 

Texas, and I am sure this is true in a number of other States, 

small advisers, any cost, any added layer that you put on is going 

to be harmful and unnecessary. 

Mr. CANSECO. Is there a way this bill could be improved to address the concerns you have as a State regulator? 

Mr. MORGAN. By excluding the States from coverage that have 

a program in place to cover investment advisers. 

39 

Mr. CANSECO. And would you include in that, those that have a 

certain quality or level of mandates or matrix? 

Mr. MORGAN. I think there would have to be a study done to determine whether or not that was even appropriate. I think the 

starting point should be that they should be excluded. 

Mr. CANSECO. Thank you very much, Mr. Morgan. I yield back. 

Chairman BACHUS. Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman, for holding this hearing. 

I do believe that it is exceedingly important, and I thank all the 

witnesses for appearing. I especially thank the Texan for appearing 

today. We are honored to have you, sir. Thank you very much. All 

of the Texans. Let me just check. We may have some Texans who 

don’t acknowledge it on paper. Do we have any other Texans? How 

many Texans? Raise your hand if you are a Texan. All the Texans 

in the house. Thank you. I really opened the door to something, 

Mr. Chairman. 

Permit me to do this, because I think that sometimes what appears to be a disagreement is an agreement that we just can’t quite 

agree on. It is a rather nebulous way of speaking, I know. But I 

think that we have three possible solutions that have been recommended to us, if I may just capsulize them: one, to use the SEC; 

two, to work with SROs, one or more; and three, to do more with 

FINRA. We have these three possibilities. But I am curious, do we 

all agree that as I speak right now, some person is, in a dastardly 

way, trying to defraud someone, and that that person ought to be 

caught? My suspicion is that as I am speaking, someone is trying 

to perpetrate a dastardly deed. 

Now, if you differ with me, kindly raise your hand. Okay. The 

absence of hands up, Madam Reporter, would seem to indicate that 

people agree with me. It is nice to have so many people agree with 

me. It is a rare thing. But now if we know that we have these persons who are trying to perpetrate these dastardly deeds, I assume 

that we all agree that we should be able to prosecute, we should 

be able to capture and prosecute them. And if you don’t agree, or 

if you think there is another way to do this without catching them, 

and maybe there is a way to prevent them from doing things, and 

I would like to see this done, but I think we all agree that somebody is going to slip through the nets probably notwithstanding 

regulation. 

We do all that we can to prevent things, but we still have cops 

on the beat so that we can capture those that will, not withstanding the best of intentions, slip through the nets. So does everybody agree that somebody is going to slip through the nets? 

Okay. Now, but we do agree, I think also, that there ought to be 

some way by which we can prevent, but also capture, prevent and 

capture people who do these things. So if this is the case, then the 

question really becomes, what is the best methodology for doing 

what we know has to be done? 

So, I have given you three possibilities. What I would like to do 

is start with Mr. Brown. And Mr. Brown, rather than go through 

a long dissertation, if you don’t mind, just tell me, do you think 

that we should use the SEC methodology, the FINRA, or should we 

go with an SRO? Where are you on it, or some combination? 

40 

Mr. BROWN. We think that an SRO should be designated to take 

on this responsibility, and we think FINRA is in the best position 

to take on that role. 

Mr. GREEN. So you are SRO and FINRA? 

Mr. BROWN. Yes, sir. 

Mr. GREEN. Okay. That is good to know. All right. Let’s go to the 

next gentleman, please. 

Mr. CURREY. Thank you, Mr. Green. Even if the examination frequency could be stepped up with the SEC, I would say that our 

members would experience that as two regulators, and that is what 

we don’t want. We want to deal with one regulator. So we support 

an SRO and FINRA as an SRO. 

Mr. GREEN. So the two of you are in the same place? 

Mr. CURREY. Yes. 

Mr. GREEN. Okay. SRO and FINRA. Thank you very much. The 

next person, please? 

Mr. HELCK. Yes. SIFMA believes that we should have consistent 

oversight and supervision, that an SRO is best prepared to do that, 

and this bill goes only part of the distance in determining exactly 

who that should be, I think that should be part of the ongoing process, to evaluate and discuss with FINRA and other alternatives 

there capabilities and make that decision when we are prepared to 

do that, but not the SEC, an SRO. 

Mr. GREEN. So you are SRO? 

Mr. HELCK. Yes. 

Mr. GREEN. Okay. Yes, sir? 

Mr. KETCHUM. H.R. 4624 has it right. There should be provision 

for one or more SROs, whether or not that SRO is FINRA. 

Mr. GREEN. SRO. Yes, sir? 

Mr. MORGAN. First, it is a Federal question; the States are doing 

their job. And with respect to the Federal question, we think that 

user fees are appropriate and that the SEC is the appropriate 

agency to handle that. 

Mr. GREEN. SEC? 

Mr. MORGAN. Yes. 

Mr. GREEN. Okay. 

Mr. TITTSWORTH. The SEC would be the most effective and most 

efficient way to deal with this issue. 

Mr. GREEN. All right. As you can see, my time has expired. I do 

appreciate, Mr. Chairman, your giving me the opportunity to ask 

these questions. And the 4 seconds I have gone over, I will give to 

you at another time. Thank you. 

Chairman BACHUS. Thank you. You actually were more diligent 

with your time than anyone else on the committee. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman BACHUS. Mr. McHenry? And thank you for chairing 

the hearing. 

Mr. MCHENRY. Thank you, Mr. Chairman. Mr. Tittsworth, you 

say in your testimony, because of the exemptions within this bill 

for large advisers, small advisers are singled out for additional regulations and costs, okay. So I want to understand this. Small advisers, do they have—are their clients of more modest income than 

large advisers? 

Mr. TITTSWORTH. Sometimes, yes, sir. 

41 

Mr. MCHENRY. Is that often or sometimes? 

Mr. TITTSWORTH. Sometimes. Advisers come in all shapes and 

sizes, Congressman. 

Mr. MCHENRY. But we are talking about the large advisers 

versus the small advisers. 

Mr. TITTSWORTH. Understood. And actually, characterizations of 

the differences between larger and smaller advisers is a generality 

as well. As you may know, in H.R. 4624, the exemptions are structured so you would be exempt from the SRO requirements if you 

have any mutual fund clients or if you meet the 90 percent test, 

which gets more complicated. 

As a general matter, the larger investment advisers would tend 

to be exempt from the SRO requirements, and as a general matter, 

smaller firms would be covered. 

Mr. MCHENRY. Right. I recognize that in my asking you the 

question. So you just confirmed to me what I knew going in. I will 

just move on, because the point I am trying to make is that if you 

have folks of more modest income, would this legislation inhibit or 

restrict their ability to get the services that they currently have? 

Mr. TITTSWORTH. I understand the question, I believe. I think 

that, as I testified, this bill could create opportunities for regulatory arbitrage. And one possibility is that an investment adviser, 

a larger investment adviser, might shed smaller, less profitable clients in order to meet the 90 percent test for SRO exemption in the 

bill. 

Mr. MCHENRY. So in your view, those folks of modest incomes 

with modest investments could be adversely affected, or in your 

view, would be adversely affected? 

Mr. TITTSWORTH. It is possible, yes, sir. 

Mr. MCHENRY. It is possible. Okay. And to that point, Mr. Helck, 

there is the distinction between broker-dealers and investment advisers. They have two different regulatory structures currently. Do 

most investors even know the distinction between a broker-dealer 

and investment adviser? 

Mr. HELCK. The SEC’s RAND study done a couple of years ago 

confirmed the fact that the public really doesn’t understand this, 

and I would offer, can’t be expected nor should they have to understand this to receive the same and consistent protections. 

Mr. MCHENRY. Okay. So as a follow-up to that, because the public doesn’t really know the difference between a broker-dealer and 

an investment adviser, do they understand the distinction between 

their regulatory structures? 

Mr. HELCK. Not at all. 

Mr. MCHENRY. Not at all. So to Mr. Tittsworth’s point about regulatory arbitrage, is that real, is that serious? 

Mr. HELCK. I would argue that we have regulatory arbitrage 

today. That is part of the problem we are trying to address here. 

To have consistent policy and oversight across all providers of individual services would clarify for the public and remove the need to 

understand the differences between various structures and provide 

consistent protection. 

Mr. MCHENRY. Okay. So in your view, broker-dealers have greater oversight today than investment advisers? 

42 

Mr. HELCK. In today’s world, firms like ours and Mr. Currey’s 

and most other providers are governed by all of the above. We are 

a registered investment adviser, we are a broker-dealer, we have 

all 50 States, and we have the SEC and FINRA, and so therefore, 

we are dealing with all of the above. It is those who are escaping 

portions of that where the inconsistencies lie, and that is where we 

need to make the level playing field. 

Mr. MCHENRY. Mr. Ketchum, Mr. Tittsworth, in his testimony, 

contends that if an investment adviser SRO were mandated, the resulting new oversight responsibilities would require the SEC to expend significant additional resources. Do you agree with that? 

Mr. KETCHUM. I don’t agree with ‘‘significant.’’ Yes, the SEC 

would have additional oversight responsibilities. They already have 

them over us as an organization, our exam program. They would 

have to add to it. I think that would be a small fraction of the cost 

of them doing the program themselves. 

Mr. MCHENRY. All right. Mr. Tittsworth, do you want to respond? 

Mr. TITTSWORTH. I think that people don’t appreciate right now 

how much the SEC spends on broker-dealer oversight in addition 

to FINRA. I believe the Section 914 report—and I would be happy 

to check on it—states that the SEC has 380 examiners on the 

broker-dealer side plus an additional 40 or 50 to oversee FINRA 

and other SROs. And the Boston Consulting Group and others, including the GAO last week, have said that the SEC doesn’t do an 

adequate job of overseeing FINRA now. 

Mr. MCHENRY. Thank you, Mr. Chairman. And thank you for 

holding this hearing on this important piece of legislation. 

Chairman BACHUS. I appreciate that, Mr. McHenry. I want to 

commend you on your oversight work on this committee and also 

on government oversight. You have done some important, meaningful work. With that, we have a unanimous consent request to introduce the statement of the Investment Company Institute in support of this legislation. 

I appreciate the Members. I think this was an interesting discussion and will serve us in good stead as we move forward in trying 

to come up with a solution that is beneficial to the American investing public, and also those who serve them as investment advisers and broker-dealers. So, thank you. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

This hearing is now adjourned. 

[Whereupon, at 12:26 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

June 6, 2012 

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