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House Committee Deciding Who Keeps Your Investment Adviser Honest

June 7, 2012

WASHINGTON - A U.S. House committee that includes Rep. Shelley Moore Capito today is taking up a bill that would allow investment advisers to police themselves, through what is called a self-regulatory organization (SRO).

Critics of the idea say that's like putting a fox in charge of the henhouse - and it's the same system that has failed to prevent investment scams such as the Madoff scandal.

The Project on Government Oversight (POGO) says SROs do not have the same transparency or accountability rules as do government agencies. POGO investigator Michael Smallberg says the Securities and Exchange Commission (SEC) should be beefed up to provide better oversight.

"We are concerned that this is one way that Congress can essentially continue to starve the SEC of its resources - which is, for us, the worst of both worlds. You end up with a weaker SEC, and you end up with more authority in the hands of a private, unaccountable self-regulatory organization."

The sponsors of the bill argue that government regulators are not getting around to inspecting independent investment advisers nearly often enough. They say the new law would help fill that gap.

Congresswoman Capito's campaign and congressional offices did not reply to several calls and e-mails requesting comment.
She has not publicly taken a position on the legislation.

Her Democratic opponent, Howard Swint, says she and the committee have a history of being too close to the financial industry. This bill follows that pattern, Swint warns.

"After what we've gone through in the financial crisis, they're beating the same drum for more deregulation, which is how I view self-regulation."

A current SRO, the Financial Industry Regulatory Authority (FINRA), has come under recent fire for being too cozy with the industry it's supposed to be watching. Smallberg says it levies small fines that investment companies pretty much view as a cost of doing business. He says FINRA is funded by fees from investment firms - and uses them to pay its top executives seven-figure salaries.

"We think these are pretty excessive compensation packages for a nonprofit group - especially one that really failed to crack down on a lot of the types of abusive trading practices that fueled the financial crisis. In addition, FINRA has spent a lot of money on lobbying and on advertising."

Smallberg says the sponsors of the bill, called the Investment Adviser Oversight Act (HR 4624), think there should be more oversight of the financial industry. However, he adds, taking that responsibility out of government hands could be asking for trouble.

Dan Heyman, Public News Service - WV