More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Creating a self-regulatory organization (SRO) to oversee investment advisors would cost at least twice as much as providing the Securities and Exchange Commission with adequate funds to examine advisors, a new economic analysis released Thursday by several advisory trade groups says.
The analysis, conducted by the Boston Consulting Group (BCG), comes a day before the House Appropriations Committee voted on a spending bill that allocates $1.3 billion for the SEC, which is $136 million more than last year’s level and $86 million less than the Obama Administration’s request.
The BCG study, commissioned by advisor trade groups and TD Ameritrade Institutional, found that bulking up the SEC’s exam program for advisors is projected to cost $240 million to $270 million per year, whereas allowing the Financial Industry Regulatory Authority to be an advisor SRO is projected to cost $550 million to $610 million per year. A newly created SRO for advisors is projected to cost even more—$610 million to $670 million per year—the BCG analysis found.
The study also found that even dual registrants (60%), which are advisors regulated by the SEC and FINRA, expressed a preference for SEC oversight over FINRA as an SRO.
What’s more, the analysis says, more than 80% of advisors polled said they would prefer to pay user fees to fund enhanced SEC exams. Eighty-one percent of advisors prefer an enhanced SEC exam model over FINRA as an SRO, while 75% of advisors said they would prefer a new SRO over FINRA even if it cost them more, the analysis states.
However, both the conclusions and the methodology of the Boston Consulting Group survey were criticized by groups including FINRA and the Financial Services Institute (see specific criticisms below).
The BCG “study makes the economic case that outsourcing investment advisor oversight to FINRA or a new SRO would cost too much and is strongly opposed by investment advisors,” said Kevin Keller, CEO of the Certified Financial Planner (CFP) Board of Standards, at a press conference announcing the study’s results. The CFP Board “firmly believes that the SEC should retain oversight of investment advisors and be given the tools to adequately do the job, including the option of imposing user fees.”
David Tittsworth (left), executive director of the Investment Adviser Association (IAA), added at the press conference that while “there is a compelling need to enhance advisor oversight, giving the job to FINRA would be the wrong choice for many reasons, including its lack of accountability, lack of transparency, weak track record, excessive costs, and its bias favoring the brokerage industry.” The BCG report, he said, “underscores the conclusion that the best and most efficient approach is to ensure that the SEC has enough examiners.”
And the boost in SEC funding provided in the House Appropriations bill—if passed—may aid in enhancing advisor exams. Said Tittsworth: The extra $136 million included in the House Appropriations bill for the SEC “is surprising and a fairly significant increase. I think the SEC can and should be able to do a better job [in examining advisors] with those extra funds.”
In this political and budgetary environment, Tittsworth told AdvisorOne in an interview, "the fact that the SEC may receive more than a 10% increase for 2012 is very significant. It demonstrates that a number of Congressional leaders believe that the SEC's work is extremely important and that additional resources are required to do its job."
Upon release, the BCG analysis—commissioned by the CFP Board, the IAA, NAPFA, the Financial Planning Association, and TD Ameritrade Insitutional—immediately drew criticism.
Howard Schloss, executive VP at FINRA, said in a statement that the cost projections in BCG’s study of FINRA becoming the SRO for investment advisors are “wildly inflated.” The study’s methodology, he said, “is flawed and not clearly explained. 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.”
Dale Brown, president and CEO of the Financial Services Institute (FSI) said that “The simple fact is FINRA is the only entity with the capacity, funding and know-how to effectively examine retail investment advisers, which is not happening now.”
Added Brown: “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. The status quo simply continues to keep investors at risk.”
But John Walsh, former associate director and general counsel at the SEC’s Office of Compliance Inspections and Examinations (OCIE), who’s now a partner with the law firm Sutherland Asbill & Brennan in Washington, told AdvisorOne that BCG’s analysis is “an effort to come up with some good numbers” regarding an SRO’s cost and that the BCG report would add to the debate of whether an SRO is needed. “To make good policy,” Walsh (left) said, “you need to talk about” whether an SRO makes sense.
A revised version of House Financial Services Committee Chairman Rep. Spencer Bachus' draft bill calling for an SRO for advisors is expected to be introduced in the spring. However, retiring Congressman Barney Frank recently told AdvisorOne that he was not in favor of Bachus' SRO bill.
The BCG report provided the following arguments that funding an SRO would likely cost advisors at least twice as much as paying user fees to the SEC.
- The average annual fee per IA firm is projected to be $27,300 for a full “Enhanced SEC” examination program; $51,700 for a FINRA-IA SRO; and $57,400 for a new-IA SRO.
- If the SEC were authorized to collect user fees to fund only the incremental cost to hire additional advisor examiners (including supporting expenses) and not the total costs of an “Enhanced SEC” examination program, the average annual fee is projected to be $11,300, less than one-fourth the fees needed to support an SRO.
- The actual approach for apportioning the fees to be paid by IA firms will need to be determined.
BCG also said that the cost savings to the SEC of creating an SRO is likely to be "minimal because the SEC would need to spend significant resources ($90–105 million) overseeing an SRO." The startup costs of an SRO alone ($200–310 million), BCG said, could fund an enhanced SEC examination program for an entire year ($240–270 million).