Majority of RIAs should move under state regulation: Study

RIA in a Box says such a transition, for advisers with less than $500M AUM, would improve exam coverage, costs

Jan 7, 2015 @ 1:23 pm

By Mark Schoeff Jr.

Shifting oversight of more registered investment advisers from the Securities and Exchange Commission to states would increase exam coverage at less cost than establishing third-party reviewers, a new report asserts.

A study by the compliance firm RIA in a Box calls for advisers with less than $500 million in assets under management to transition to state regulation, a move that would involve about 7,250 of the approximately 11,400 investment advisers currently registered with the SEC.

“If states were to ultimately embrace this solution, even at a lower than $500 million AUM threshold, we do believe [it] could help address the core problems of increasing the frequency of RIA audits while mitigating the potential increased costs to small-business RIA firms scattered across the country,” the study said.

Under the Dodd-Frank financial reform law, approximately 2,100 advisers with AUM less than $100 million switched their registration from the SEC to states in an effort to decrease the SEC workload and increase the percentage of exams it can conduct. The SEC examines about 10% of registered advisers annually.

The North American Securities Administrators Association, which represents state regulators, reacted cautiously to the report.

“NASAA has consistently held that the regulation of investment advisers should continue to be the responsibility of state and federal government and that these regulators must be given sufficient resources to carry out this mission,” William Beatty, Washington securities director and NASAA president, said in a statement. “We look forward to reviewing the study's recommendations.”

The Investment Adviser Association, which supports the politically difficult option of increasing SEC funding for exams, was wary of the proposal.

“Although states have responded positively to the growth in their authority, it is probably too early to assess their capability to handle another large influx of advisers,” said Neil Simon, IAA vice president for government relations.

Even after the Dodd-Frank RIA switch, the SEC registration numbers stayed steady because the agency took on approximately 1,500 new private-fund advisers.

The RIA in a Box study praised the states for smoothly adding the advisers under $100 million to their registrant pool, saying the state exam cycle is every four years, compared to the SEC's once-a-decade cycle.

GJ King, RIA in a Box president, said increasing the ceiling for state oversight to $500 million AUM would be a natural transition.

“An $80 million RIA firm looks and feels much more like a $400 million RIA firm that the SEC is tasked with regulating,” Mr. King said. “States are well-equipped to regulate local RIA firms, while the SEC continues to show that it has the ability to regulate multistate, multinational RIA firms that have additional risk and complexity associated with their larger operations.”

Increasing the SEC examination rate for investment advisers has been a matter of contention for years. Although the SEC received a $150 million budget increase for fiscal 2015, that may not be enough to significantly boost adviser examinations.

One alternative is to allow the SEC to charge advisers user fees for exams. Legislation that would have authorized SEC user fees died last year in Congress. Even if the measure is reintroduced this year, it will face strong resistance from House Republicans.

“IAA continues to believe that SEC user fees offer the greatest benefit to the advisory profession and investors,” Mr. Simon said. “I'm looking for bipartisan activity in the Senate.”

A 2011 study by the Boston Consulting Group found that the average annual fee per RIA firm for enhanced SEC examination would be $27,300.

Mr. King is leery of user fees.

“Any minimum could really hurt these small firms,” he said. “At the state level, there's less a risk of being a small fish in a big pond.”

Another idea floated is using third-parties to conduct RIA exams. SEC Chairman Mary Jo White said the agency is studying the idea, which has strong support from SEC member Daniel Gallagher Jr.

The RIA in a Box study estimated that third-party exams would cost firms with $500 million in AUM about $30,000 if they were conducted every year.

Third-party exams are not imminent.

“There's not a fleshed-out proposal,” Mr. Simon said.


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