SEC to advisers: Pay new fees or face more exams

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

Jan 20, 2011 @ 3:59 pm

By Mark Schoeff Jr.

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 OCIE expansion.

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.


What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

What the next market downturn means for small RIAs

Firms that have enjoyed AUM growth because of the runup in stocks may find it hard to adjust to declining revenues if the market suffers a major correction.

DOL fiduciary rule likely to live on despite appeals court loss

Future developments will hinge on whether the Labor Department continues the fight to remake the regulation its own way.

DOL fiduciary rule: Industry reacts to Fifth Circuit ruling

Groups on both sides of the fiduciary debate had plenty to say.

Fifth Circuit Court of Appeals vacates DOL fiduciary rule

In split decision, judges say agency exceeded authority.

UBS, after dumping the broker protocol, continues to see brokers come and go

The wirehouse has seen 14 individuals or teams leave and five join for a net loss of $2.4 billion in AUM


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print