Market Overview

Washington is Meddling With Your Investments... Again


Republican U.S. Representative for Alabama's 6th district, Spencer Bachus, is once again pushing ahead with a bill he authored that will potentially shake up the regulatory environment for investment firms and, if passed, is likely to have some unwanted trickle down effects for many small investors.

After seemingly putting the bill on the back burner, due to lack of bipartisan consensus on the bill's structure, making passage unlikely, Representative Bachus last week decided to dust off the bill with fervor by firing a shot across the bow both at advisory firms and their overseer in some strongly worded comments. He is once again making a push, that if successful, will change how advisory firms are regulated.

Currently, advisory firms are overseen by the Securities and Exchange Commission (SEC) but Representative Bachus would prefer the regulatory body to be either FINRA, which currently oversees Broker-Dealers or another, newly created Self-Regulatory Organization (SRO). The key piece of evidence most often cited by Rep. Bachus as justification for the change is the Madoff scandal, which according to the Representative the SEC was solely to blame for.

While it seems the Representative's heart is in the right place based on his oft stated desire to prevent future Madoff-like frauds from happening, a worthy goal no doubt. The Representative is in many ways misguided about how best to prevent such situations from occurring.

First, the SEC, while certainly deserving the lion's share of blame for their failure to proactively put an end to the Madoff ponzi scheme, even when given evidence by cooperative former insiders is hardly the only entity to blame. For a number of years prior to SEC oversight the overseer of the Madoff organization was none other than FINRA itself.

Secondly, the issue is less about which entity does what and more about whether or not they have the proper training, resources, and support to uncover and deal with potential regulatory violations. I would argue that changes to the current structure, even mass overhaul if that is what is needed, would be much more effective than blowing up the system and attempting to start over both from an institutional memory perspective as well as cost.

Third, I think that while FINRA has by most accounts done a pretty good job at regulating broker-dealers it is still an SRO, with the emphasis being on ‘S' for self. Given what has happened in markets in recent years, having an industry, especially the financial services industry, police itself is going to be a tough sell to the average investor.

Lastly, and most importantly it often comes down to cost and this is no exception. Costs associated with starting a new SRO would undoubtedly be high. This is not surprisingly one of the biggest hurdles in getting this bill passed. Advisors are largely against the bill as they claim it would increase their costs, and thus, most likely their client's costs, as the new price of regulation is likely to be pushed down to the consumer level. Personally, I favor any increased levels of oversight for the industry but we have to be mindful of the consumer - a consumer who is already paying approximately 1% of assets for advisory services, on average, plus in many cases another 1% or more for mutual fund expenses or trading costs. In some years when all these fees are paid there is enough money to go around for everyone but the investor.

Contact Representative Bachus and let him know you favor increased scrutiny over financial services firms but ask that it be done in a manner that doesn't place additional significant burden on you, the investor. Or let your local Representative know your thoughts on the matter by finding their contact information here.

About the author: Michael Prus is the President and Founder of Scale Investment Group, LLC, a registered investment advisory firm based in White Lake, Michigan. The company manages money for clients and is a consumer advocate, most notably championing greater transparency of the investment advisory industry and lower fees for investment products as well as portfolio management services. Contact Michael directly at


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