SEC exams could cost RIAs thousands – or even millions

Study pegs the annual cost for industry at $310 million, but fees for individual firms would vary based on AUM

Sep 3, 2014 @ 10:54 am

By Mark Schoeff Jr.

Investment advisory firms would pay anywhere from a couple thousand to millions of dollars annually in user fees to fund Securities and Exchange Commission exams, if the agency uses that approach to increase its adviser oversight, according to a new study released Wednesday.

The compliance consultant RIA in a Box estimates that the average annual increase in cost to RIA firms would be about $310 million, with an average cost per firm of $27,013.

The rate for any given firm, however, would vary greatly because the averages are driven up by large RIA firms. RIA in Box estimates that the average annual cost increase per $1 million in assets under management would be $5.65. That means a firm with $500 million in AUM would pay an annual user fee of $2,824, while one with $2.5 billion in AUM would pay $14,121.

The largest firms would pay the most in user fees. The Vanguard Group Inc., with $2.35 trillion in AUM, would be assessed an annual user fee of approximately $13.268 million, while Pacific Investment Management Co. would pay $11.017 million and Capital Research & Management & Co. would pay $7.257 million.

Although primarily asset managers, Vanguard and Pimco each is registered with the SEC as both a “large advisory firm” with assets under management of $100 million or more and as “an investment adviser to an investment company.” It is not clear that they would be subject to the user fee, said G.J. King, president of RIA in a Box.

The RIA in a Box study responds to a bill introduced by Rep. Maxine Waters, D-Calif. and ranking member of the House Financial Services Committee, that would allow the SEC to charge investment advisers user fees to fund exams.

The RIA in a Box calculation is considerably higher than the $100 million to $110 million total cost increase of more frequent SEC exams that the Boston Consulting Group estimated in a 2011 study. The BCG study was based on the assumption that the SEC would exam advisers once every four years, while RIA in a Box assumed that examinations would occur every three years. The SEC currently examines advisers every 11 years.

Neil Simon, vice president for government relations at the Investment Adviser Association, criticized the RIA in a Box study for basing its estimate solely on a firm's AUM.

“We're pleased that folks are taking the user-fee proposal seriously and are examining it,” Mr. Simon said. “We have far more confidence in the study done by the Boston Consulting Group than this cursory study by RIA in a Box.”

RIA in a Box calculated the costs by estimating the amount of additional money the SEC would have to spend on hiring more RIA examiners and then allocated it to firms based on their AUM.

“The rigor that went into the BCG analysis was much more robust,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc. “They worked to develop economic analysis from the ground up rather than backing out a number.”

In an interview, Mr. King acknowledged that it's unclear how the bill would be implemented were it to become law, a factor that makes projecting its financial impact on firms difficult. For instance, it's not certain whether an annual user fee would be assessed or firms would be charged each time they're examined. What Mr. King is trying to do with the study is get the industry to think about its costs, he said.

“By no means are we claiming that this study is as thorough nor are we trying to poke holes in the paid BCG study from a few years back,” Mr. King said. “We have nothing but incredible respect for the IAA and all that it does to support RIAs. We're trying to continue the conversation and highlight important details of potential implementation of [proposed] legislation, which could have a significant impact on smaller SEC-registered RIA firms.”

Ms. Waters' measure is designed to help the SEC increase its annual examination rate, which is currently about 9% of the approximately 11,500 investment advisers registered with the agency. The user fees would not apply to RIAs with less than $100 million in AUM, which are registered with the states.

The SEC said it needs a substantial budget increase to hire more RIA examiners. But Congress has not approved such a boost in recent years and is poised once again this year to deny most of the SEC funding request.

Under Ms. Waters' bill, the SEC would assess user fees based on the incremental cost of increasing the frequency of examinations, as well as on an RIA's assets under management, number and type of clients and its risk characteristics.

The measure is unlikely to achieve a hearing, much less a vote, in the Republican-majority House. A companion bill has not been introduced in the Democratic-led Senate. But the user fee approach is backed by investment adviser advocacy groups and has been endorsed by SEC investor advocate Rick Fleming.

Mr. Simon said he is “hopeful” that a bill will be introduced in the Senate this fall. The likelihood of it passing before the end of the year is small, but it could lay the foundation for another try in 2015.

“There is growing recognition that this is a bipartisan, good government investor protection issue,” Mr. Simon said. “I see increasing signs that it is gaining traction in Congress.”


What do you think?

View comments

Recommended for you

Sponsored financial news

Advisers on the Move

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

State measures to prevent elder financial abuse gaining steam

A growing number of states are looking to pass rules preventing exploitation of seniors.

Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence.'


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