SEC offers 3 options for RIA oversight

Recommends that Congress authorize user fees or designate Finra or one or more other SROs

Jan 23, 2011 @ 12:01 am

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 advisers.

The answer the agency gave in a report delivered to Capitol Hill Wednesday night likely will stoke the debate over a self-regulatory organization, rather than end it. The agency offered 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 report, put together by the agency staff, extolled imposing 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.

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 went 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 prospect that Finra will become 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 [more-]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 illustrated 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's assuming the mantle of adviser oversight.

“Government entities do have accountability to voters and in-vestors,” 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 should contain 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. Titts- worth said. “These are important issues that were never fully aired in Dodd-Frank.”

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

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

Congress likely will want to make some kind of policy change that would strengthen adviser oversight. The SEC said in its report that 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 assets under management of 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 stated.

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.

E-mail Mark Schoeff Jr. at


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