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The New Self-Regulator for Advisors: A Taxing Affair for Small Businesses and Small Investors

Inadequate examinations of advisors is a real problem, but it is hard to imagine a less efficient or less fair way to solve it than the proposal in a recent House bill.

Last month, House Financial Services Committee Chairman Spencer Bachus proposed legislation to create a self-regulatory organization for investment advisors ("IA-SRO"). He presented the bill as the solution to the underfunded Securities and Exchange Commission's record of examining advisors only once every 11 years. "That lack of oversight, particularly in the aftermath of the Madoff scandal," Bachus stated, "is unacceptable."

The problem is that Madoff and others like him would not have had to register with the new IA-SRO. It will not have jurisdiction over advisors like Madoff with institutional or high net worth clients. In fact, the bill exempts so many advisors that the IA-SRO would examine only a small fraction of SEC-regulated advisors. The overwhelming majority of managed assets would continue to be examined by the SEC while providing no additional funding to improve upon its 11-year cycle. The SEC's program may deteriorate even further with the recent addition of hedge funds to the ranks of registered advisors. At the same time, the bill would impose a tax on small advisory businesses and, indirectly, the mainstream investors they advise, from which large advisors and their high net worth clients would be exempt.

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