Advisers to SEC: Take our money, please

RIAs back pay-for-regulation oversight by commission as way to keep Finra out of the picture

Oct 11, 2009 @ 12:01 am

By Sara Hansard

Willing to go to any length to avoid oversight by Finra, financial advisers are reluctantly accepting the idea of paying the SEC to regulate them. The pay-for-regulation concept, advanced by Securities and Exchange Commission member Luis Aguilar, is incorporated in legislation introduced Oct. 1 by Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. The proposed legislation recommends that the SEC should collect fees “designed to help recover the cost of inspections and examinations of registered investment advisers.” “We would prefer paying SEC user fees rather than paying fees to Finra,” said David Tittsworth, executive director and executive vice president of the Investment Adviser Association, which represents advisory firms regulated by the SEC.

Some advisers, however, aren't confident that the SEC will be given broader regulatory powers over the advisory business.

“I do not see the SEC willing to set up a new [self-regulatory organization] just for investment advisers,” said Richard Salmen, president of the Financial Planning Association and senior vice president of GTrust Financial Partners, which manages $400 million. “I see Finra trying to fill that space.”

Advisers have long argued that the Financial Industry Regulatory Authority Inc., which oversees the brokerage industry under different regulations and is pushing to gain jurisdiction over advisers, isn't a good choice to regulate advisory firms.

“Finra doesn't have any experience with our business [and] doesn't really understand it,” said William Baldwin, chairman of the National Association of Personal Financial Advisors and president of Pillar Financial Advisors, which manages about $600 million. “Their whole DNA is regulating a culture that has a much different standard of care for the client.”

In this economic climate, user fees may be the best way to raise money to pay for SEC oversight of investment advisers. SEC Chairman Mary Schapiro and Mr. Aguilar have called for allowing the commission to keep transaction and other fees it collects as a way to increase overall SEC funding, but it isn't yet clear if that idea will become part of financial services regulatory reform.

“If that's not in the cards, I would urge that the examination program with respect to investment advisers be self-funded,” Mr. Aguilar said.

But paying more in fees may not guarantee more-effective oversight by the SEC, Mr. Salmen said.

Indeed, North American Securities Administrators Association Inc. president Denise Voigt Crawford argues that increased oversight of advisers can be accomplished by state regulators without increasing fees. NASAA has called for allowing the states to take over regulation of advisory firms that manage $100 million or less.

“If we do that, [the SEC] should have more resources to spend on investment adviser regulation,” and the federal securities regulator could concentrate on the largest advisory firms, said Ms. Crawford, who is the securities commissioner of Texas.

The SEC regulates advisory firms that manage more than $25 million. Raising the threshold to $100 million would shift 4,200 advisers from the SEC to state registration and regulation, according to figures compiled by the IAA.

Not surprisingly, Richard Ketchum, Finra's chairman and chief executive, opposes imposing user fees in order for the SEC to keep control of the advisory industry. “I don't think it's a satisfactory alternative to a self-regulatory organization for investment advisers,” he said.

The SEC estimates that it will examine about 9% of the advisory firms it regulates in the fiscal year that began Oct. 1, according to SEC spokesman John Heine.

By contrast, Finra examines about half of all brokerage firms annually, and imposing user fees isn't likely to significantly increase the share of advisory firms the SEC can inspect, Mr. Ketchum said. Coordinating exams between Finra and the SEC would be difficult and ineffective, he argued.

There is ample precedent for imposing fees to cover regulatory costs in the financial services industry. In addition to the fees Finra charges brokerage firms to cover their regulatory costs, banks pay fees to the Office of the Comptroller of the Currency to cover the cost of their exams.

No estimates are available on how much advisers would have to pay if the user fee proposal is adopted.

E-mail Sara Hansard at shansard@investmentnews.com.

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