Partner Center Find a Broker

Before I go to the nitty-gritty of the possible impact of the SRO bill, let me first tell you what it is.

What is the SRO Bill?

The SRO bill is simply a proposal that aims to hand over the responsibility of regulating registered investment advisers (RIA) from the U.S. Securities and Exchange Commission (SEC) to self-regulatory organizations (SRO).

For those who don’t know yet, a RIA is a person or a firm that usually sells trading advice, recommendations, and reports, usually through publications. Meanwhile, an SRO is a non-governmental organization that has the power to enforce industry regulations.

The bill, authored by House Financial Services Committee Chairman Spencer Bachus and co-sponsored by Rep. Carolyn McCarthy, is a response to claims that the SEC doesn’t have the resources to effectively regulate RIAs. Supporters of the bill aim to prevent large-scale investment frauds like the ones committed by Bernard Madoff and Allen Stanford.

Bachus noted that the average SEC-registered RIA can only expect to be examined less than once every 11 years. Apparently, in 2011 the SEC only examined 8% of the RIAs compared to 58% of its registered broker-dealers.

Why are Registered Investment Advisers (RIAs) against the SRO bill?

Aside from the possibility of stricter enforcement of industry regulations, RIAs are against the SRO for two main reasons. First, the bill would force RIAs with retail clients to register with at least one SRO, comply with their rules, and pay its membership fees.

Of course, this could translate to higher operating costs, which only few small RIA firms could afford. This could result in loss of profits for several RIAs or even force some out of the industry.

How will the bill affect retail traders?

From the perspective of retail traders like you and me, increased regulation and accountability among investment advisers is definitely a plus in our book. After all, industry watchdogs such as the CFTC and NFA could use a little more help when it comes to overseeing these advisory services to better protect retail traders from scams.

Also, creating an SRO for investment advisers would level the playing field by making sure that RIAs comply with the same set of rules, potentially making the environment more competitive and investor-friendly.

However, as I mentioned, abiding by an SRO’s rules could result in additional costs for RIAs and even force some out of business. And, with various SROs regulating the existent RIAs, the industry could be prone to inconsistencies in different policies and implementation procedures.

Of course several details of this legislation are still up for discussion, but it does sound promising. I’ll make sure to keep you posted on any updates so stay tuned to my blog!