Without the additional $324 million it requested, the SEC won't be able to hire additional personnel to expand RIA examinations. What does this mean for advisers?
Federal lawmakers are poised to give the Securities and Exchange Commission a budget that will fall far short of what the SEC says it needs to expand its annual examinations of investment advisers.
In a $1.1 trillion omnibus budget that was released Monday night and likely will be approved by Congress this week, the SEC is set to receive a $1.35 billion budget for this fiscal year — a $29 million increase from fiscal 2013. That number is $324 million less than the SEC's budget request.
In several appearances before Congress this year, SEC Chairman Mary Jo White has said that one of the commission's top funding priorities is to hire 250 investment-adviser examiners to augment the staff of about 400.
The SEC has argued that it lacks the resources to examine annually more than about 8% of the nearly 11,000 registered investment advisers.
It SEC said that about 40% have never been examined.
Those numbers may not change much under the SEC's fiscal 2014 allocation.
“It's the smallest increase I can remember for the SEC,” said Neil Simon, vice president for government relations at the Investment Adviser Association.
“It doesn't provide adequate funding," he said. "It's not going to allow the SEC to staff up [the Office of Compliance Inspections and Examinations].”
The SEC will have to make do with a budget that is essentially declining, according to Duane Thompson, senior policy analyst with Fi360 Inc., a fiduciary-duty consulting firm.
“Any effort to hire additional investment adviser examiners is highly unlikely unless they make some major reallocation decisions,” he said.
“It seems that the SEC will have less [funding] to work with than last year, just based on inflation. I don't think you're going to see any bump in the exam cycle that the SEC would like to see," Mr. Thompson said.
The SEC criticized the funding level that Congress is set to approve.
“It will limit our ability to bolster our enforcement and examinations programs, implement our new duties regarding derivatives, private-fund advisers and municipal advisers and invest in critical technology for market oversight and law enforcement,” SEC spokesman John Nester said in a statement. “It is particularly frustrating considering that funding for the SEC does not contribute to the federal deficit.”
Congress sets the SEC spending levels. But the commission funds its budget with fees that it charges market participants.
The budget legislation, which totals 1,582 pages, contained 31 lines on the SEC. In addition to the overall funding level, it requires that the SEC allocate $44.5 million to the Division of Economic and Risk Analysis.
That directive, in part, reflects Republican demands that the SEC conduct more rigorous cost-benefit analyses of regulations.
If Congress isn't going to give the SEC the money that it has requested for investment adviser oversight, advocates hope that it will do so through separate legislation that would allow the commission to charge advisers user fees for examinations.
A measure has been introduced by Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee, that has attracted six Democratic co-sponsors. Committee Republicans are unlikely to grant it a hearing.
“I am hopeful we will see a bill introduced in the Senate,” Mr. Simon said.
Generating GOP support in the House “is going to be difficult to achieve," he said.
"The House appears to be more partisan and divided than the Senate," Mr. Simon said.
