Investment Adviser Oversight

Overview

“The IAA has consistently supported appropriate and effective regulation and oversight of the investment advisory profession by a single governmental regulator – the SEC.”

The IAA has consistently supported appropriate and effective regulation and oversight of the investment advisory profession by a single governmental regulator – the SEC. The agency, however, faces significant resource challenges in providing effective oversight of the nation’s approximately 11,000 federally-registered advisory firms and in maintaining a robust examination program. This is evidenced by an examination rate of 8% in 2012 and the 9% rate for 2013. Moreover, approximately 40% of investment advisers have never been examined.

The need to increase the frequency of investment adviser examinations has been a consistent SEC theme for several years. Former SEC chairman Mary Schapiro and current chair Mary Jo White have both testified before Congress regarding the need to improve oversight through increased examinations. Their pleas follow an SEC staff study conducted pursuant to Section 914 of the Dodd-Frank Act that directed SEC staff to analyze the SEC’s oversight of advisers and to make recommendations to Congress on ways to improve it. As a result, SEC staff primarily recommended two alternatives, namely establishing a self-regulatory organization (SRO) or collecting user fees from industry to pay for examinations.

Position

“The IAA supports the assessment of an appropriate user fee on investment advisers.”

To ensure that the SEC has sufficient resources for investment adviser oversight, the IAA believes that Congress should – in lieu of an SRO as has been advocated by FINRA – authorize the SEC to assess fairly apportioned investment adviser user fees that would be used solely to provide an enhanced level of examinations by the SEC. Thus, the IAA supports the assessment of an appropriate user fee on investment advisers as would be authorized by H.R. 1627, the “Investment Adviser Examination Improvement Act of 2013.” This bill, introduced by Reps. Maxine Waters (D-Calif.) and John Delaney (D-Md.) on April 19, 2013, would permit the SEC to impose user fees on SEC-registered investment advisers that would be dedicated to enhancing the SEC’s examination program and subject to proper administrative process and Congressional oversight.

The IAA strongly opposes the establishment of an SRO for advisers because it would impose a costly additional layer of regulation and bureaucracy on advisers without providing a commensurate benefit to investor protection. The SRO model advocated by FINRA also raises concerns regarding inherent conflicts of interest; questions regarding transparency, accountability, track record, and appropriate oversight by the SEC and Congress; and lack of due process.

Additionally, an SRO would cost at least twice as much as funding an enhanced SEC examination program. According to a December 2011 economic analysis by the Boston Consulting Group, the incremental cost of the SEC hiring additional examiners necessary to examine advisory firms on average once every four years would be $100-$110 million. In contrast, the annual cost of an SRO operated by FINRA would be $550-610 million.

For these reasons, the IAA led the successful opposition to H.R. 4624, the “Investment Adviser Oversight Act of 2012” – in the last Congress. This legislation, sponsored by former House Financial Services Committee Chairman Spencer Bachus (R-Ala.) and not reintroduced in the current session, would have subjected thousands of advisory firms to broad rulemaking, inspection and enforcement authority by a private, quasi-governmental regulator, in all likelihood FINRA.

Resources

Overview

H.R. 1627

H.R. 4624

IAA Testimony & Comment Letters

Economic/Cost Analyses & Additional Reports

Media

Other Perspectives