INVESTMENT ADVISER SRO – The “Colorado Experiment.” Part Four

Written by: Phil Feigin

They say if you stick around long enough, everything will happen again. So it is for the IA SRO concept for me. It was many years (and pounds) ago, when I served as Colorado Securities Commissioner. I had succeeded in winning adoption of the Colorado Securities Act in 1990, replacing what I felt was the worst state securities law in the country. It had been adopted in a deregulatory wave of 1981. In late 1993, I undertook to amend the 1990 Act in the 1994 legislative session by adding investment adviser regulation. Colorado was one of the handful of states that had never regulated investment advisers or their advisory personnel.

Colorado’s General Assembly was always hostile to providing new authority, funding or staff to its regulatory agencies. The state was in what seemed to be an eternal fiscal crisis. Any new regulation with licensing and inspection authority, if adopted at all, could have no fiscal impact. That appeared to pose an irreconcilable problem unless we changed the parameters of the problem.

In desperation, I came up with what I thought would be a novel solution only available in Colorado. What I knew as the International Board of Standards and Practices for Certified Financial Planners (“CFP Board”) was headquartered here in Denver, and already had in place a form of testing, application screening, licensing, continuing education and an oversight program for certified financial planners. I approached the CFP Board director to see if naming the CFP Board some sort of self-regulatory organization (“SRO”) for Colorado investment advisers was even theoretically possible. When he didn’t say “absolutely not,” I at least floated the idea publicly.

At this point, I harken back to my classification a blog or two ago in which I divided the investment advisory profession into three general groups:  (i) money managers; (ii) retail advisors; and (iii) fee-only planners. Suffice it to say for these purposes that these three general groups are loosely bound together by the facts they deal in securities, they are generally subject to either federal or state investment adviser registration and regulation, they charge fees based on AUM, and they reside on Earth. Oh, and members of each group hold themselves in higher esteem than the other two groups.

Now, back to my Colorado story. My 1994 IA legislative proposal was plain vanilla, standard state investment adviser regulation, i.e., a bill I thought had a chance of passing. As I recall it now, a local, activist fee-only planner (and mind you, I have great respect for fee-only planners generally) with no regulatory or legislative experience decided that Colorado was uniquely situated to be the first state to outlaw anything but fee-only advice. He fashioned a rival bill that, as I recall it, would have given Colorado expansive and unprecedented authority over advisers. Thus, in my view, given Colorado’s tendencies, the bill was DOA.

Nonetheless, this planner apparently won the support of Gretchen Morgenson [now a New York Times (self-professed) Wall Street critic, but at the time, executive editor of Worth magazine]. Ms. Morgenson absolutely skewered me in her November 1993 Worth article (“Investor Watchdog or Industry Pussycat”), accusing me of betraying investors by lending regulatory credibility to the CFP Board and its accreditation program by suggesting it could serve as a state SRO. (It should be noted that, although CFPs are held to relatively high ethical standards by their Board, they are permitted to sell products as well as provide investment advice and financial planning services.) As I recall, Ms. Morgenson and this fee-only planner were critical that CFP qualification tests were flawed, and that advisers with the CFP certification were permitted to sell products as licensed securities and insurance agents as well as advise for fees. My 1994 IA bill was likely going to die in any event, with or without the “help” from my planner and Worth fan. And it eventually did.

To that point in time in my government career, one defense lawyer had called me a heartless, cut-throat regulator, and a Colorado state senator had assailed me and my staff in a public hearing, accusing us of using what he termed “Gestapo tactics” in our investigations (being of Jewish decent, that one was particularly sweet to me). However, until the Worth article, I had never been accused of being some sort of investment industry lap dog. (I still remember Gretchen’s article to this day, not that I would hold a grudge for almost 20 years.)

Anyhow, a few more years, one National Securities Markets Enhancement Act (1995), one Democratic Senate, and one or two major advisory frauds later, I finally succeeded in ramming a new, relatively standardized IA bill through, and Colorado at last had an investment advisor law, effective January 1999, sans SRO.

Now, almost 20 years after my desperation Colorado IA SRO trial balloon was “Hindenberged,” Rep. Spencer Bachus has (R-Ala.), Chair of the House Financial Services Committee, has proposed the “Investment Adviser Oversight Act of 2012.” If it passes, the measure will give the SEC the authority (read “order them”) to create and oversee one or more SROs for federal and state registered investment advisers and investment adviser representatives.

Where’s Gretchen when we need her?

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