A new report issued by the Government Accountability Office (GAO) explores whether a self-regulatory organization (SRO) should assist the Securities and Exchange Commission (SEC) with its oversight of private funds, including hedge funds and private equity funds.
The GAO acknowledges that the SEC currently does not have the capacity to effectively examine registered investment advisers. But does that mean Congress and the SEC should allow the private fund industry to regulate itself?
Among other things, the GAO raised concerns that the self-regulation of private fund advisers has the potential to:
- increase the overall cost of regulation by adding another layer of oversight;
- create conflicts of interest, in part because of the possibility for self-regulation to favor the interests of the industry over the interests of investors and the public; and
- limit transparency and accountability, as the SRO would be accountable primarily to its members rather than to Congress or the public.
POGO believes these factors have significantly hindered the effectiveness of the Financial Industry Regulatory Authority (FINRA), the SRO for the broker-dealer industry. A recent article in Bloomberg raises additional concerns about having FINRA or any other SRO oversee investment advisers, such as FINRA’s binding arbitration process and the generous compensation packages paid out to FINRA executives.
Rather than outsourcing even more of the SEC’s authority to an industry group, we urge Congress to give the SEC and other government regulatory agencies the funding they need to accomplish their mission, including their expanded responsibilities under the Dodd-Frank financial reform legislation.
Michael Smallberg is a POGO Investigator.