More On Legal & Compliancefrom The Advisor's Professional Library
- The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
Investment advisory trade groups released a review by the Boston Consulting Group (BCG) Thursday refuting the Financial Industry Regulatory Authority’s (FINRA) cost estimates in assuming the role of a self-regulatory organization (SRO) for advisors.
The review, conducted by BCG on behalf of the Certified Financial Planner Board of Standards (CFP Board), Financial Planning Association (FPA), Investment Adviser Association (IAA), National Association of Personal Financial Advisors (NAPFA) and TD Ameritrade Institutional (TDAI), says that FINRA’s one-and-a-half page estimate released on April 25 underestimates overhead costs and overestimates investment advisor examiner productivity.
FINRA issued a statement after the BCG findings were released, which stated that "until the Boston Consulting Group has at least one conversation with the SEC and FINRA about what it takes to run a nationwide examination program, their numbers should be viewed with skepticism and amusement. They are inventing the numbers out of thin air."
FINRA released its cost estimates the same day Rep. Spencer Bachus, R-Ala., and Rep. Carolyn McCarthy, D-NY, introduced legislation authorizing the creation of an SRO for advisors. FINRA is said to be the lead candidate in assuming such an SRO role.
FINRA's April 25 estimate of its startup and ongoing annual investment costs should it become SRO for advisors was far below projections released by BCG in December.
Highlights of BCG’s review of FINRA’s estimates include the following:
- FINRA’s estimate omits the cost of SEC oversight ($90-$100 million) and the cost of enforcement ($60-$70 million), both of which are required by the legislation;
- FINRA’s estimate of $12-$15 million in setup costs does not include staff costs incurred during the 12-month setup period, specifically the cost of examiners and support staff. FINRA only includes these expenses as part of its ongoing investment once the SRO is up and running. This omission accounts for $180-$230 million of the difference between the BCG and FINRA estimates;
- FINRA’s estimate of the ongoing annual cost of examining 14,500 IA firms once every four years assumes that FINRA’s IA examiners would be able to nearly double the productivity rate of SEC IA examiners, by performing 5 or more examinations per examiner per year. This compares to SEC IA examiner productivity of 3.0, and FINRA broker-dealer examiner productivity of 2.8. This productivity assumption accounts for $150-$170 million of the difference between the BCG and FINRA estimates; and
- FINRA’s estimate does not include overhead costs in its estimate of $150-$155 million of ongoing annual investment. Overhead costs account for $135-$140 million of the difference between the BCG and FINRA estimates.
The trade groups also released a side-by-side comparison of the FINRA and BCG cost estimates the same day.
“We believe that the review of FINRA’s cost estimates confirms the independent economic analysis conducted by BCG last year. We think it would be a mistake to add an unnecessary layer of regulation and cost on small businesses that deliver sound advice to investors,” the group sponsoring the BCG review said in a statement. “We continue to believe that oversight of investment advisors should stay with the Securities and Exchange Commission, the most cost-effective alternative.”
Chris Paulitz, spokesman for the Financial Services Institute (FSI), said in reaction to the BCG review that “FSI has long championed the small business needs of all financial advisors and, at the same time, worked to protect consumers. Instituting even basic RIA examination will level the playing field for all advisors, protect consumers and help RIAs flourish as trust is gained in their business model.”