While giving downsides for the idea of an SRO to govern advisors, the SEC opens the door for Congress to consider all options

January 20, 2011 — 2:36 PM UTC by Elizabeth MacBride


In a much-anticipated study released around 9 p.m. Wednesday, the SEC recommended that Congress consider three alternatives to increase examinations of investment advisors: imposing user fees, authorizing an SRO, and having FINRA examine dual registrants.

Of the three options, the report lists user fees first and seems to make the strongest case for them, based on the fact that it discusses no downsides for that approach. It noted negatives and positives for the second two options. Commissioner Elisse Walter, a supporter of the SRO option, issued a statement supporting the need for an SRO and casting doubt on whether even user fees would give the SEC the necessary resources to regulate the growing world of RIAs.

Whether Congress will take any action based on the study remains to be seen, but concerns about regulation of investment advisors remains strong in Congress. Shifting oversight of any advisors to an SRO or to FINRA would require legislation.

Lobbied for SRO

There are Congressional supporters of such a move — which has become highly politically charged topic as FINRA and some broker-dealers have lobbied for an SRO.

The report was issued two days after its Dodd-Frank mandated deadline of Monday. Late last night, RIABiz reached David Tittsworth, executive director of the Investment Adviser Association, who said he believed the report makes the strongest case for the option of funding increased examinations by the SEC’s Office of Compliance Inspections and Examinations through user fees. See: Most RIAs prefer to pay money for SEC exams now than pay in blood later under an SRO

The IAA has supported user fees as an alternative to SROs. Such fees would likely hit smaller advisors, who are already struggling with compliance costs, hard.

Other advisor advocates and organizations with an interest in the issue, such as FINRA, the North American State Securities Administrators and the Investment Company Institute could not be reached for comment, though RIABiz will continue to update the story.

“The report sets forth a range of options for enhancing investment adviser examinations, including relative advantages and disadvantages of each. It lays the groundwork for substantive Congressional deliberations in the coming weeks and months,” Tittsworth said. “It’s likely that Congressional hearings will take place on these issues but it’s very difficult to predict the timing. The new Congress is still in its organizational stages and there are many other competing issues.”

In her statement, Walter says that the report does not delve deeply enough into the challenges facing the SEC as it struggles to implement Dodd-Frank, or into how much regulatory capacity an SRO would add.

“OCIE’s current examination rate for investment advisers (9%)—which it estimates could drop as low as 7% in 2011 if additional examiners are not added—would have to increase by nearly five times to reach the average SRO examination rate for these years (43.5%), and more than six times to reach the average rate at FINRA (55.5%),” according to her statement.

“There are additional facts that I think need to be aired,” the statement adds. “As the few facts set out above suggest, the study is not sufficiently clear about the challenges that the Commission is facing today in examining investment advisers.”

Startup costs

The report details both the upsides and downsides of both the SRO option – the upsides being that it would take some of the burden off the SEC; the downsides being startup costs and complicated governance issues – and the option of having FINRA examine dually registered advisors.

While a FINRA takeover of regulation of hybrid advisors would result in some efficiencies and probably increase the number of examinations due to FINRA’s greater resources, the report notes, it is not a complete solution because it would only cover a small portion of investment advisors.

FINRA issued this response to the report: “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. We agree with the SEC that an SRO can augment government oversight programs through more frequent examinations. As we have consistently stated, customers of investment advisers would benefit from the additional protection afforded by SRO oversight.”

Details on the user-fee option

On the user-fee option, the report had this to say:

“Importantly, imposing user fees would avoid the difficult scope of authority, membership, governance, and funding issues raised by an SRO, discussed below,” said the report. “It would avoid the need for the Commission to use resources to staff an expanded SRO examination program. User fees also would shift the cost of regulation to the advisers themselves. Registered investment advisers currently bear little of the cost of their regulatory oversight as compared to other groups of participants in the financial services markets.”

Growth in the advisory business

The report emphasizes the growth in the investment advisory business, saying that that the growth in SEC resources has not kept pace. (See the posted charts below). Despite comments from NASSA that have pointed out how much of the burden state regulators are taking off the SEC’s shoulders as a result of the What advisors should know about the next sweeping change: the switch from SEC oversight to state regulation the SEC said continually moving advisors to state oversight was not a solution.

“State regulators may not have adequate resources to continue to assume increased regulatory responsibilities, and investor protection could be compromised if such resources are lacking,” the report said.

Here’s the link to the study and to Walter’s statement.

Source: SEC study
Source: SEC study

Source: SEC study
Source: SEC study


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