The Securities and Exchange Commission’s appointment of Eileen Rominger, an 11-year veteran of Goldman Sachs Asset Management, as its new director of investment management, marks the first time in decades — if ever — that the agency has named an industry executive with no legal background to the position.

And fund executives and observers are optimistic that her appointment could mean that the agency will take into account the practical needs of the industry when enacting reforms, particularly relating to 12(b)-1 and money market funds.

On Jan. 18, the SEC announced that Ms. Rominger, 56, will start at the agency in February, replacing Andrew J. “Buddy” Donahue, who left in November. She retired as chief investment officer at Goldman Sachs Asset Management in December. Before that, she managed equity portfolios at Oppenheimer Capital LLC and overall has more than 30 years of portfolio management experience.

“We seek proven leaders with the right combination of experience, expertise and commitment to fulfill our investor protection mission,” said John Nester, a spokesman.

Ms. Rominger’s appointment demonstrates that Chairman Mary Schapiro is responding to outside criticism that the agency has been “too insular,” said Barry Barbash, former director of the SEC’s Division of Investment Management and now a partner at Willkie Farr & Gallagher LLP.

“Chairman Schapiro was looking for a non-lawyer because she recognized that so many of the rules that need to be done by the division will have significant implications for the industry, and some business expertise will be crucial,” Mr. Barbash said.

Specifically, experts believe that under Ms. Rominger’s leadership, the Division of Investment Management may look at 12(b)-1 reform in a new light.

“Someone familiar with the fund industry will at least be more sympathetic with some of the claims and challenges that executives have brought up around 12(b)-1 reform,” said Russel Kinnel, director of research at Morningstar Inc.

Under that proposal, fund firms could charge a “marketing and service fee” of up to 0.25%. Anything above that amount would be deemed an “ongoing sales charge,” which would be limited to the highest fee charged by the fund for shares without marketing and service fees.

The proposal also would allow fund companies to create a new class of shares through which broker-dealers could set their own sales charges on mutual funds. The comment period on the SEC’s (b)-1 plan ended Nov. 5 and generated more than 1,000 letters.

One major criticism of the proposal levied by industry groups is that the SEC needs to address the 12(b)-1 issue in the context of all of the other regulations associated with Dodd-Frank. Indeed, many observers noted that the SEC has to examine 12(b)-1, as they would be affected by a universal fiduciary standard of care.

Under Ms. Rominger, it’s likely that the SEC may review the proposal in light of the practical needs of the industry, said Joel Goldberg, a partner at Stroock & Stroock & Lavan LLP. Mr. Goldberg led the Division of Investment Management in the 1980s.

“Historically, the SEC would use the Investment Company Act to deal with conflicts of interest in the investment management industry,” he said.

For example, with the 12(b)-1 proposal, the agency started with the premise of “what is permitted under the Investment Company Act,” Mr. Goldberg said. “Now it may look at what would work best for investors and the industry, and we will worry about a rule that permits that after we decide where we want to be.”

In a statement, Investment Company Institute president and chief executive Paul Schott Stevens applauded Ms. Rominger’s appointment.

“Her qualifications will very effectively serve the interests of America’s mutual fund investors and the mission of the SEC more broadly,” Mr. Stevens said in his statement.

The ICI, which represents the fund industry, declined to comment beyond the statement.

Money market fund gurus are also hopeful that Ms. Rominger will be favorable to the industry’s position on money market reform.

Last year, the President’s Working Group on Financial Markets, which comprises officials from the Treasury Department, the Federal Reserve, the Financial Stability Oversight Committee and the SEC, proposed eight reforms to provide greater stability in the money market fund industry. Among those proposed reforms: allowing money market funds to have a floating net asset value. Comment letters from the fund industry — including one from Goldman Sachs Asset Management — attacked the proposal.

Instead, funds, including GSAM, favor an ICI proposal for an industry-sponsored backstop that would provide liquidity to money market fund in times of severe market conditions.

While Ms. Rominger wasn’t in charge of money market funds at GSAM, the Goldman unit is one of biggest money managers in the U.S., with $138 billion in money market assets as of Dec. 31, according to Crane Data LLC.

“I don’t know which was better news for the money fund industry — that a GSAM executive was named head of the division or that Donohue left,” Mr. Crane said, noting that Mr. Donahue kept the idea behind the floating NAV alive despite industry opposition.

Some fund executives are concerned, however, that since Ms. Rominger isn’t a lawyer, she may be easily swayed by the attorneys at the agency, said one industry official who has spoken to fund executives.

“The industry is concerned that by not being a lawyer steeped in the industry, she is likely to be influenced by the career lawyers on staff,” said the official, who requested anonymity.

But regardless of her views, everyone agrees that with Dodd-Frank reform on the agency’s plate, Ms. Rominger will have her hands full for some time.

“With all the Dodd-Frank-related matters, my sense is that it will be some time before the agency gets to 12(b)-1 reform,” Mr. Barbash said.

After studying the “inklings of [an M&A] revival in 2010,” Morningstar deputy director of research R.J. Hottovy said deals in the year ahead will be larger and more plentiful than in the past few years.

Morningstar identified nearly 100 companies that it deemed takeover targets.

In addition to considering the record levels of cash sitting on corporate balance sheets and in leveraged-buyout firms, and the funds of private-equity firms — all of which supports mergers-and-acquisitions activity — the research identified specific targets based on valuation and balance sheet scenarios.

By sector, the report identified communication services, health care, utilities and banks as the most attractively valued categories.

However, Mr. Hottovy explained, attractively valued companies can be found in virtually every sector.

The energy sector, for example, is listed as the second-most-fairly-valued category, behind basic materials. Yet, four of the 10 most likely acquisition targets identified in the report are energy-related companies.

Those companies are Cloud Peak Energy Inc. (CLD), Constellation Energy Group Inc. (CEG), Petrohawk Energy Corp. (HK) and Range Resources Corp. (RRC).

Rounding out the top 10 in alphabetical order are Actelion Pharmaceuticals U.S. Inc. (ATLN), American Eagle Outfitters Inc. (AEO), Clearwire Corp. (CLWR), Leap Wireless International Inc. (LEAP), Myriad Genetics Inc. (MYGN) and SunTrust Banks Inc. (STI).

“We expect some of the key M&A themes to include interest in emerging markets, companies that have mastered a unique niche in their respective industries, and the ability to generate free cash flow,” Mr. Hottovy said.

Along those lines, the report singled out as attractive targets Mead Johnson Nutrition Co. (MJN), which makes baby food, and Millicom International Cellular SA (MICC), a wireless telephone service provider.

In industries of high cyclicality, companies that have carved out a particular niche within a sector could be attractive, Mr. Hottovy said. As examples, the report listed asset management firm Eaton Vance Corp. (EV) and AptarGroup Inc. (ATR), a provider of consumer product dispensing systems.

n the face of vitriolic comments by congressional leaders about hiking tariffs on Chinese imports, Goldman Sachs Asset Management’s chairman believes that global economies will continue to grow in coming years. And much of that growth, he says, will be based on the People’s Republic’s continued economic expansion.

“This idea that China’s growth is at the expense of everyone else’s is three years out of date,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said at a media breakfast today at Goldman’s headquarters in New York.

China will contribute an increase of more than 30% to the global GDP for the period from 2010 to 2019, according to Goldman’s projections. In fact, the economies of the U.S. and other major countries will largely benefit as Chinese imports continue to grow, he said.

Mr. O’Neill cited a few anecdotal examples demonstrating how European companies were already benefiting from China’s prosperity. For example, Mr. O’Neill said that he had heard from a friend that outside of the Louis Vuitton store on the Champs Elysées in Paris, Chinese tourists offer people money to buy them bags because there is a one bag per person policy.

“These are things you don’t hear about,” he said.

President Hu Jintao is in Washington, meeting with President Barack Obama and members of Congress. The trip included a state dinner — the first for a Chinese president in 13 years.

But three of the four top congressional leaders, including House Speaker John Boehner, R-Ohio, skipped the dinner.

Meanwhile, Sen. Sherrod Brown, D-Ohio, and Sen. Olympia Snow, R-Maine, are sponsoring a bill that would place higher taxes on some Chinese imports.

Overall, Mr. O’Neill is bullish on world economic growth — largely buoyed by China — and anticipates global equities to growth 15-20% in many regions.

Corporate bonds also are attractive, he said.

One snag in Mr. O’Neill’s rosy outlook: interest rates. “From an investing perspective, I am very supportive of an environment for investors to be thinking about equity,” he said. “Unless we enter or until we enter a period where interest rates rise sharply.”

While Mr. O’Neill declined to predict when interest rates might rise, he said he keeps a close eye on the University of Michigan’s five- to 10-year inflation expectation survey as a key indicator, along with the Federal Reserve, and to a lesser extent, the value of the U.S. dollar. He didn’t say whether he also tracks the renminbi.

Vanguard Emerging Market ETF became the third-largest U.S. exchange-traded fund this week, surpassing a rival BlackRock Inc. fund that just a year ago was twice as big, and adding to evidence that investors are migrating to the cheapest offerings.

The Vanguard fund had $46.2 billion as of yesterday, more than the $46 billion in iShares MSCI Emerging Markets, according to data compiled by Bloomberg. At the end of 2009, the BlackRock fund was twice as large as Vanguard’s, according to Chicago- based Morningstar Inc.

“There is a pricing war going on,” Paul Justice, director of ETF research at Morningstar said in a telephone interview. “Investors see these as commodities and are saying, ‘Why not go for the one with the lowest expense.’ ”

Vanguard has captured market share in the almost $1 trillion U.S. market for ETFs by using the same low-price strategy it employed to become the nation’s largest mutual-fund firm. Vanguard’s emerging market ETF charges a fee of 27 cents per $100 invested, compared with 69 cents for its BlackRock rival.

Vanguard’s competitors may be forced to cut prices on certain products, said Dave Nadig, director of research at Index Universe, a San Francisco-based financial media company.

“BlackRock must be wringing its hands,” he said in a telephone interview.

The two emerging-market ETFs ranked third and fourth in asset size as of Dec. 31, according to State Street Corp. The biggest ETF was the $90 billion SPDR S&P 500 ETF Trust sold by State Street.

Blame It On Rio

While both emerging-markets funds attempt to track the same index, the MSCI Emerging Markets Index, their results have not been identical. Since U.S. stocks reached a 12-year low March 9, 2009, the Vanguard ETF returned 151 percent compared with 137 percent for the BlackRock fund, data compiled by Bloomberg show. The index returned 150 percent.

Because emerging-market stocks are not always easy to buy, it can difficult to duplicate the performance of the underlying index, said Paul Justice from Morningstar.

“The iShares MSCI Emerging Markets Fund has an excellent track record since its inception and a large base of investors who value its deep liquidity,” Jennifer Grancio, head of iShares U.S. distribution at BlackRock, said in an e-mailed statement.

The firm has seen clients allocating money to country ETFs including its Brazil, Korea and Taiwan funds, as well as to domestic funds, said Christine Hudacko, a spokeswoman for BlackRock.

Pure Plays

“Our suite of emerging market offerings, the largest in the ETF industry at $87 billion, has seen increasing flows into single-country funds, as investors become selective about their emerging market exposure,” Grancio said. “This is a theme our investment strategists and others advocate as investors look to capitalize on the growth in emerging markets.”

ETFs trade throughout the day like stocks and usually mimic indexes. Investors added $111 billion to U.S. ETFs last year, which pushed assets at yearend to $995 billion, according to Boston-based State Street.

BlackRock, based in New York, jumped into ETFs with its $15.2 billion acquisition of Barclays Global Investors in December 2009, which added the iShares funds. The world’s largest money manager, BlackRock had $3.45 trillion in assets under management as of Sept. 30.

The firm had $450 billion in U.S. domiciled ETFs at the end of 2010, the most of any company, according to data compiled by State Street. State Street was second with $235 billion; Vanguard was third with $148 billion.

Fee Wars

Vanguard was initially reluctant to offer ETFs. Founder John Bogle criticized the product for encouraging short-term investing. In 2001, Vanguard introduced the Total Stock Market ETF, their first such product. Vanguard ETFs are separate classes of the firm’s index mutual funds, a structure the company has patented.

Vanguard had $1.38 trillion in mutual-fund assets at the end of November, more than any other company, according to data from the Investment Company Institute, a Washington-based trade group. Investors added $40.3 billion to its ETFs last year, compared with $29.3 billion for BlackRock and $16.3 billion for State Street, according to State Street data.

Vanguard’s emerging-market ETF collected $19.3 billion in deposits in 2010, compared with $2.3 billion for the BlackRock offering, Morningstar data show.

That success “speaks to the fact that investors value low-cost portfolios,” Joel Dickson, a principal at Valley Forge, Pennsylvania-based Vanguard, said in a telephone interview.

Vanguard charges an average of 17 cents per $100 on its ETFs, less than one-third of the industry average, Morningstar data show. BlackRock cut the fee on its emerging-market ETF to 69 cents per $100 from 72 cents, the company disclosed in filings this month.

–Bloomberg News–

Franklin Templeton Investments has expanded the adage “all politics are local” to international investing.

The Franklin World Perspectives Fund, launched Dec. 16, has raised the stakes on the idea of a globally managed mutual fund for U.S. investors. Following in the footsteps of an offshore version launched in October 2008, it taps local asset management operations in offices around the globe.

That is no small distinction, according to Stephen Dover, international chief investment officer for Franklin Templeton’s local asset management group.

“The history of investing globally has normally involved an Anglo person getting on a plane” and traveling to a foreign country to do research, said Mr. Dover, who is portfolio manager of the new fund. “But as [the global markets] have developed, the quality of the local money managers have improved as well.”

The fund, which is about two weeks away from having a ticker symbol, allocates slices of the portfolio to autonomous Franklin Templeton asset management offices in India, Vietnam, China, Japan, Korea, Canada, Brazil, Dubai and the United Kingdom.

Franklin Templeton started opening local offices, run by local asset managers, 15 years ago. In total, the local asset management operations now manage $20 billion.

Combing the local expertise into a single fund creates a globally diversified and dynamic portfolio of more than 250 securities, with an annual turnover rate of around 80%.

“This is a fund that is managed 24-7,” Mr. Dover said. “That’s a lot different from just having a fund managed whenever the portfolio manager is in the office.”

Mr. Dover is responsible for allocating slices of the portfolio to the local asset managers.

A neutral allocation, he explained, would track the MSCI All Country Index, which Franklin Templeton has tweaked to add a minor weighting in frontier markets such as Vietnam.

The portfolio’s largest weighting is the United States, at 40%, compared with a 42% benchmark weight.

The fund is tracking the benchmark with a 25% allocation to Europe.

The next-largest weighting is the Asia-Pacific region at 18%, compared with a 15% benchmark weight.

Other examples of where the portfolio is out of sync with the MSCI index are the 5.5% allocation to Japan, versus 9% for the benchmark; a 3% allocation to Brazil, compared with a 2%; and 1.5% to frontier markets, which make up just 0.5%.

Mr. Dover said that in terms of performance, the impact of the local asset management presence is more important than any benchmark overweighting or underweighting.

“Most of the value will be created by the local managers,” he said. “Instead of just using the research from the local managers, we are empowering the local managers.”

The offshore version of the fund gained 14.8% last year, compared with a 13.3% benchmark return.

For an example of the unique perspective added by the local asset managers, consider the $5.8 billion Templeton World Fund (TEMWX), which has 94 positions, only 10 of which are also in the World Perspectives Fund.

“Our local asset management teams provide a bottom-up perspective on market conditions and valuations,” Mr. Dover said. “This insight means that our investments are not limited to the largest and most visible companies in each market but often include less recognizable names.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

After studying the “inklings of [an M&A] revival in 2010,” Morningstar deputy director of research R.J. Hottovy said deals in the year ahead will be larger and more plentiful than in the past few years.

Morningstar identified nearly 100 companies that it deemed takeover targets.

In addition to considering the record levels of cash sitting on corporate balance sheets and in leveraged-buyout firms, and the funds of private-equity firms — all of which supports mergers-and-acquisitions activity — the research identified specific targets based on valuation and balance sheet scenarios.

By sector, the report identified communication services, health care, utilities and banks as the most attractively valued categories.

However, Mr. Hottovy explained, attractively valued companies can be found in virtually every sector.

The energy sector, for example, is listed as the second-most-fairly-valued category, behind basic materials. Yet, four of the 10 most likely acquisition targets identified in the report are energy-related companies.

Those companies are Cloud Peak Energy Inc. (CLD), Constellation Energy Group Inc. (CEG), Petrohawk Energy Corp. (HK) and Range Resources Corp. (RRC).

Rounding out the top 10 in alphabetical order are Actelion Pharmaceuticals U.S. Inc. (ATLN), American Eagle Outfitters Inc. (AEO), Clearwire Corp. (CLWR), Leap Wireless International Inc. (LEAP), Myriad Genetics Inc. (MYGN) and SunTrust Banks Inc. (STI).

“We expect some of the key M&A themes to include interest in emerging markets, companies that have mastered a unique niche in their respective industries, and the ability to generate free cash flow,” Mr. Hottovy said.

Along those lines, the report singled out as attractive targets Mead Johnson Nutrition Co. (MJN), which makes baby food, and Millicom International Cellular SA (MICC), a wireless telephone service provider.

In industries of high cyclicality, companies that have carved out a particular niche within a sector could be attractive, Mr. Hottovy said. As examples, the report listed asset management firm Eaton Vance Corp. (EV) and AptarGroup Inc. (ATR), a provider of consumer product dispensing systems.

But as great as we are, we don’t have a monopoly on good ideas. And one sign of greatness, whether seen from the humility or the competitiveness perspective, is the ability to recognize the good ideas of others and use them.

Given our problems and challenges — ranging from the crummy economy, to a too-high rate of intractable poverty, to an expensive but flawed educational system — it’s time we made a greater effort to identify the best of what works in other countries, and put those ideas to use here.

Let me start with a ridiculously simple example of an idea we could appropriate from abroad.

Before the Dutch adopted the euro as their currency, they printed their guilders with little Braille bumps to help the blind identify the denominations. What a great idea! The U.S. government has said that adding the bumps to our currency would be too expensive and that the bumps would flatten out during circulation. I say if the Dutch did it 20 years ago, we could do it, too.

Take a bigger example: our education system. We’re trying charter schools, smaller schools, independent schools and all other sorts of experiments. Why not try importing one of the top foreign models as an experiment? If we’re too timid to bring in educators from Singapore — which regularly whips us in the international education rankings — let’s ask the Finns for help.

Indeed, mild-mannered Finland is another country which regularly tops us in education. So why not have some Finland’s finest come to the USA and show us how they do it on about $1,500 a year per pupil (we spend thousands more), which includes health care and free lunch for all students. By the way, Finnish schools produce 100% literacy and nearly a 100% graduation rate from primary school.

Let me touch a political third rail and mention another huge American problem: drugs. Our nation’s current drug policy contributes to the incarceration of a larger percentage of our population than any other Western nation. It also contributes to political instability and corruption in Mexico, which costs us billions in national security and makes a mockery of our immigration laws. And let’s not even mention the role of drugs in funding terrorism.

Why not take a page from Portugal, Denmark and Switzerland, and decriminalize drugs? Until 2002, when it decriminalized drug use (but kept in place punishment for traffickers), Portugal — and especially parts of its capital, Lisbon — were overrun with drug users. Crime and diseases including hepatitis C and HIV were rampant. Since then, drug use has declined after an initial spurt, and crime has come down substantially. As an experiment, isn’t drug decriminalization worth a shot?

For better financial ideas, we would do well to look at a country much like our own: Australia.

“Superannuation” is what the Aussies call their national retirement program, which mandates that employers put 9% of an employee’s earnings into qualified funds. Employees can make voluntary contributions on top of that, and a means-tested government pension system exists as a safety net for those at the bottom end of the economic ladder.

Australian businesses complained about the burden the system imposed when it was introduced in 1992 but today benefit from the more dynamic and liquid domestic capital market the system has spawned. Would it kill corporate America, which is rolling in dough despite the weakness of our recovery and which has managed to asphyxiate defined-benefit pensions while lining CEOs’ pockets, to kick in the money to secure the future of their workers? I doubt it.

(By the way, since financial advisers guide much of the superannuation investing, Australia requires that all financial advisers act as fiduciaries.)

For further proof that adopting foreign ideas can work spectacularly well, look at what Japan did after its defeat in World War II. Instead of continuing to turn out the low-quality junk they produced before the war, Japan’s manufacturing leaders listened to Joseph M. Juran and W. Edwards Deming — American experts in statistical-quality-management techniques who unfortunately were being ignored in the U.S. — and began making high-quality, superior products that were less expensive than the competition’s.

Using American know-how, consider what Sony, Honda and Minolta did to RCA, GM and Kodak.

Isn’t it time that we took a lesson from Japan and looked abroad for good ideas, too?

LPL Investment Holdings Inc. will look to recruit at least 400 net new registered reps and investment advisers this year and into the future, while top executives at the firm acknowledge that attracting top brokers is getting more expensive.

The cost of bringing independent contractor reps and advisers to LPL has recently increased, LPL chief executive Mark Casady said in an interview today. Mr. Casady was making his first public statements about LPL since its initial public offering in November, in which he sold $58 million of company stock.

While wirehouses have offered upfront bonuses of 200% to 300% of a rep’s prior year’s production, independent broker-dealers — which pay reps a much higher commission rate — typically have offered far less in upfront money.

“Historically, it’s been about seven cents on the dollar, and now it’s maybe 10,” Mr. Casady said. “The overall average has gone up, and there are definitely some cases, particularly with multimillion-dollar practices,” that skew the figures of the average deal, he said.

LPL’s range for upfront money on average has been between 6% and 12% of a broker’s prior year’s fees and commissions, Mr. Casady said.

LPL’s competitors keep a close eye on the firm and how it recruits brokers and advisers, especially the number of brokers it brings on and the upfront recruiting bonuses it pays.

Over the past decade, LPL was a recruiting juggernaut, growing from 3,596 reps and advisers to 12,000. (See how other indie-B-Ds compare to LPL’s rep count.) The firm offered its shares to the public in November, and currently has a market capitalization of $3.65 billion.

Eighty-percent of the firm’s growth last decade came from recruiting, Mr. Casady said, with the rest coming from about half-a-dozen acquisitions of reps from broker-dealers. At the end of last year, it closed the acquisition of assets from National Retirement Partners Inc. and acquired 206 advisers focusing on retirement planning.

Mr. Casady acknowledged that the firm’s overall head count was “flat” at the end of September. That, however, didn’t mean LPL had an off-year in recruiting, he said.

About 720 brokers left in the first nine months of 2010, which was due to the integration of broker-dealers acquired in 2007 onto LPL’s platform. Those brokers were replaced by 750 new brokers — and their production far outstripped those that left, Mr. Casady said.

The brokers that left averaged less than $50,000 per year in fees and commissions, while those that joined averaged $250,000 to $350,000 in fees and commissions, he said. That represents “inherent growth” in the coming months and years for LPL, Mr. Casady said. “That will provide some really nice growth for us on a going-forward basis.”

He declined to recruiting numbers for the fourth quarter. LPL will report its head count of advisers when it releases its earnings Feb. 7.

LPL saw a pickup in interest from wirehouse advisers, starting in the middle of 2010. Many brokers at the major wirehouses took retention or “stay bonuses” in 2009, Mr. Casady noted, and as advisers work those bonuses off over time, they are more inclined to contemplate changing firms.

Establishing a self-regulatory organization for investment advisers is one of three options the Securities and Exchange Commission offered to Congress as a way to strengthen oversight of financial advice.

In a report sent Wednesday night to House and Senate committees with jurisdiction over the agency, the SEC recommended that Congress take one of three steps: authorize the commission to impose user fees on advisers to bolster its examination and enforcement efforts; allow the commission to designate one or more adviser SROs; or grant the Financial Industry Regulatory Authority Inc. the power to examine broker dealers who are dually registered as investment advisers. (Read the full report here.)

The lack of a clear call for an SRO upset one commissioner, Elisse Walter, enough that she issued a clarification of her position even though she signed off on the study.

Congress would have to pass legislation approving an SRO before one could be set up.

The SEC staff report, mandated by the Dodd-Frank financial reform law, illustrated that the number and frequency of adviser examinations by the Office of Compliance Inspection and Examination has declined over the last six years. In 2010, for example, OCIE reviewed 9% of the 11,888 investment advisers registered with the agency.

That exam rate could decline over the next several years because the number of advisers and their assets under management likely will outpace the growth of OCIE staff, according to the report. Even though about 3,350 advisers with AUM between $25 million and $100 million will be shifted from SEC to state regulation under Dodd-Frank, the agency will become responsible for the more complex task of monitoring advisers to hedge funds and private equity funds. (Watch INTV for more viewpoints on the fiduciary standard and an SRO for advisers.)

“The (SEC) staff believes that the commission likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency,” the report states.

For Ms. Walter, that conclusion cries out for an SRO.

“Although I voted to release the study, for the first time in my tenure as a commissioner, I feel that it is necessary for me to write separately in order to clarify and emphasize certain facts, and ensure that Congress knows that the current resource problem is severe, that the problem will only be worse in the future, and that a solution is needed now.” (Read the commissioner’s full letter here.)

Finra examines 55.5% of broker dealers annually. OCIE would have to add 2,000 staff to match that output, Ms. Walter asserted..

“It is an understatement to say that these increases would be difficult to achieve, even if the funding authorized under the Dodd-Frank Act were ultimately appropriated,” Ms. Walter wrote.

SEC funding problems have been exacerbated under a continuing resolution approved by Congress that is in place until March 4. The measure requires all federal agencies to operate at last year’s funding levels until Congress passes a new budget. The impasse has denied the SEC an 18% increase in funding for fiscal year 2011 called for by Dodd-Frank.

Ms. Walter stressed that an SRO would bring more resources to bear on adviser oversight and ensure more frequent examinations.

The “SRO option has significant and long-term benefits to investors and the commission, and I am on record supporting it – although I do not believe that there has to be a single SRO or that it has to be Finra,” wrote Ms. Walter, a former Finra official.

Adviser organizations stridently oppose designating Finra as the SRO. They argue that Finra is poorly suited to monitor advisers, who must meet a fiduciary standard of care. Finra enforces the less stringent suitability standard on broker dealers, who are required to sell investment products that meet a client’s needs, timeline and risk appetite.

Finra supports an SRO for advisers and has hinted that it is well positioned to take on the role.

“The SEC has thoughtfully evaluated the need for additional oversight of investment advisers and has rightly concluded that having the ability to leverage SRO resources could be advantageous to assisting the Commission,” the organization said in a statement Wednesday night. “As we have consistently stated, customers of investment advisers would benefit from the additional protection afforded by SRO oversight. Investors deserve the same level of protection regardless of whether they are dealing with a broker or investment adviser.”

Agency’s much-anticipated report on adviser oversight fails to offer single approach; controversy ahead

In the Dodd-Frank financial reform law, Congress asked the Securities and Exchange Commission to assess how it could strengthen regulation of financial advice.

The answer the agency gave in a report delivered to Capitol Hill Wednesday night will likely stoke the debate over a self-regulatory organization for advisers rather than end it. The agency offered up three options — each of which is unpalatable to different industry groups. And no matter how that issue is resolved, it’s likely that advisers eventually will have to pay higher fees for oversight.

In the study, the SEC recommended that Congress take one of these steps:

> Authorize the commission to impose user fees on advisers to fund its examination and enforcement efforts.

> Allow the commission to designate one or more self-regulatory organizations to oversee advisers.

> Grant the Financial Industry Regulatory Authority Inc. the power to examine the registered investment adviser business, as well as the broker-dealer side, of dually registered firms.

The agency staff that put together the report extolled the virtues of increasing the user fees, arguing that such a move would provide funding for the SEC’s Office of Compliance Inspections and Examinations free from the uncertainties of the congressional appropriations process.

Fees from publicly traded companies are how the SEC funds the Public Company Accounting Oversight Board, the agency that monitors the audit industry.

According to the report, the money from adviser fees would give that office greater flexibility and effectiveness and would be a less costly option than establishing an SRO.

While noting that setting up an SRO would “augment government oversight programs through more-frequent examinations,” the report goes on to point out an SRO’s drawbacks, such the fact that an SRO still would consume SEC resources and that many questions surround an SRO’s authority, membership and governance.

It also noted tension expressed in the investment adviser community about the potential of Finra becoming the adviser SRO.

The tone of the report — and its lack of a clear call for an SRO — upset one SEC commissioner, Elisse Walter, who issued a statement clarifying her position even though she signed off on the document.

“I would have strongly preferred that the study make more precise and objective recommendations,” wrote Ms. Walter, a former Finra official. “Unfortunately, the study’s description and weighing of the alternatives is far from balanced or objective.”

Opponents of an SRO see the report as underscoring their argument for continued SEC oversight.

“On balance, it made a pretty strong case for user fees,” said David Tittsworth, executive director of the Investment Adviser Association. “On balance, it cited more disadvantages for the SRO option than for user fees.”

Finra, however, also saw evidence in the report that strengthened its push for an SRO.

The report illustrates that the number and frequency of adviser examinations by the Office of Compliance Inspections and Examinations has declined over the last six years.

In 2010, for example, the office reviewed 9% of the 11,888 investment advisers registered with the agency. In 2009, Finra examined 54% of the broker dealers under its aegis.

“The report clearly lays out that the SEC does not currently have the resources to effectively examine investment advisers,” said Howard Schloss, Finra’s executive vice president for corporate communications. “Two of the three options talk about how an SRO or multiple SROs can help fill that gap. That’s really critical.”

Ms. Walter was adamant in her support of an SRO.

The “SRO option has significant and long-term benefits to investors and the commission, and I am on record supporting it — although I do not believe that there has to be a single SRO or that it has to be Finra,” she wrote.

Others, however, are wary of an SRO assuming the mantle of adviser oversight.

“Government entities do have accountability to voters and investors,” said David Massey, deputy securities administrator in North Carolina and president of the North American Securities Administrators Association Inc. “That amount of transparency is not the same with an SRO model.”

Those pushing for Finra oversight stress that its board contains more public members than industry members, reducing the worry of bias.

Congress will have to be the final arbiter of adviser regulation. Establishing an SRO and authorizing the SEC to impose user fees each would require passage of legislation.

“There are a lot of issues on user fees that depend on the details of legislation,” Mr. Tittsworth said. “Among them: ‘How much would they be? Would they be assessed based on the size of the advisory firm or its assets under management?”

“Hearings would be appropriate,” Mr. Tittsworth said. “These are important issues that were never fully aired in Dodd-Frank.”

Finra also is prepared to lobby Congress, where Rep. Spencer Bachus, R-Ala., now heads the House Financial Services Committee. In the Democratic-controlled Senate, Sen. Tim Johnson, D-S.D., is the new chairman of the Senate Banking Committee.

“What we have found in our discussions on this issue is that there has been support on both sides of aisle for looking at an SRO,” Mr. Schloss said.

Congress likely will to want to make some kind of policy change that would strengthen adviser oversight. The SEC said in its report the exam rate could decline over the next several years because the number of advisers and their assets under management likely will outpace the expansion of the Office of Compliance Inspections and Examinations.

Even though about 3,350 advisers with AUM between $25 million and $100 million will be shifted from SEC to state regulation under Dodd-Frank, the agency will become responsible for the more complex task of monitoring advisers to hedge funds and private-equity funds.

“The [SEC] staff believes that the commission likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency,” the report states.

Congress also will have to sort out SEC funding. Like all federal agencies, it has been operating under a continuing resolution that is in place until March 4. The SEC must work under last year’s funding levels until Congress passes a new budget. The impasse has denied it an 18% increase in funding for fiscal year 2011 called for by Dodd-Frank.

One thing is certain. The legislative process will take a long time.

“The controversy is just going to continue,” Mr. Massey said.