Cost is new front in adviser SRO fight
A report last week claiming that it would cost investment advisory firms more than twice as much if they were overseen by a self-regulatory organization than if the SEC continued its oversight was quickly attacked by SRO proponents.
A report last week claiming that it would cost investment advisory firms more than twice as much if they were overseen by a self-regulatory organization than if the SEC continued its oversight was quickly attacked by SRO proponents.
The Boston Consulting Group report, which was commissioned by a coalition of anti-SRO groups, pegged the annual cost of enhanced examinations by the Securities and Exchange Commission at $240 million to $270 million annually, and the average annual fee per firm for examinations at $27,300.
The annual cost would be $550 million to $610 million if the Financial Industry Regulatory Authority Inc., which currently regulates broker-dealers, also were designated to oversee advisers, with the cost per firm estimated at $51,700.
A brand-new SRO would cost $610 million to $670 million annually, with individual advisory firms forking over $57,400.
Oversight of RIAs was cited in the Dodd-Frank financial reform law, which mandated that the SEC study the issue. The SEC currently examines only 8% of the nearly 12,000 advisers registered with the agency. Advisory firms can go 11 years without getting an SEC review.
The three options in the BCG report are the most often cited as possible solutions to registered investment adviser oversight. The report was based on publicly available research, studies and reports. In addition, the consulting firm conducted 40 in-depth interviews with advisory firms, industry organizations, former regulators and experts.
But those groups in favor of an SRO said the report is inaccurate.
“The cost projections in this study of Finra becoming the SRO for investment advisers are wildly inflated,” Howard Schloss, Finra’s executive vice president, said in a statement.
“The methodology is flawed and not clearly explained,” Mr. Schloss said. “And the fact that The Boston Consulting Group never asked to sit down with Finra or the SEC to discuss projected costs of IA oversight is evidence this study was never a serious attempt to explore costs.”
The study was sponsored by four groups opposed to an SRO — the Certified Financial Planner Board of Standards Inc., the Financial Planning Association, the Investment Adviser Association and the National Association of Personal Financial Advisors — as well as TD Ameritrade Institutional.
“The BCG study presents a compelling economic case to keep oversight of investment advisers at the SEC,” Kevin Keller, the CFP Board’s chief executive, said at a news conference in New York last Thursday. “We believe this report will have a significant impact on the policy debate.”
The study suggests that an “enhanced” SEC adviser examination program could be achieved by adding 417 examiners to the SEC’s Office of Compliance Inspections and Examinations. The SEC would need about $110 million more annually to fund the expansion, ensuring that advisers were examined at least once every four years, according to the report.
Political realities, however, probably will make it difficult for the SEC to obtain the increased funding required to step up its adviser examination program. Republicans in Congress have been especially critical of the SEC for not detecting the Bernard Madoff Ponzi scheme and other investment frauds, and have put limits on new SEC funding.
That bolsters the case for Finra to expand its mandate beyond broker-dealer oversight to include investment advisers.
“The simple fact is, Finra is the entity with the capacity, funding and know-how to effectively examine retail investment advisers, which is not happening now,” Dale Brown, chief executive of the Financial Services Institute Inc., said in a statement. The FSI represents independent broker-dealers.
“When the SEC’s own chair and commissioners acknowledge that an SRO is necessary, and that the SEC can’t do the job, then it doesn’t make much sense to keep pushing the improbable,” Mr. Brown said.
Advisers stridently resist the thought of being regulated by Finra. They contend that Finra, which enforces the suitability standard for broker-dealers, lacks the expertise to administer the fiduciary standard to which advisers must adhere.
The results of an online survey of 424 investment advisers that accompanied the BCG report shows that 81% prefer SEC oversight to Finra.
David Tittsworth, executive director of the IAA, argues that Finra lacks accountability and transparency, and would be biased toward the broker-dealer model. Now he and his allies are brandishing the BCG study to assert that an SRO — whether it is Finra or another — also would be more expensive.
“Expanding Finra would impose extraordinarily high costs on investment advisers, most of which are small businesses,” Mr. Tittsworth said.
Another report released last week, however, said that giving the SEC more resources isn’t the answer to strengthening adviser oversight.
“The commission must confront the brutal fact that it has insufficient resources [for examinations] and that Congress is unlikely to substantially increase its budget or provide the agency with self-funding authority,” according to an SEC reform report by the U.S. Chamber of Commerce. “If an effective self-regulatory organization cannot be created, the SEC should adopt one of the several alternative approaches structured around a private-sector examination program.”
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