More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
The battle over whether there should be a self-regulatory organization (SRO) for advisors continues.
FINRA is now refuting a review that investment advisory trade groups had the Boston Consulting Group (BCG) conduct that challenged FINRA’s cost estimates in assuming the role of an SRO for advisors.
The review, which was released May 10 and 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), said that FINRA’s one-and-a-half page estimate released April 25 underestimated overhead costs and overestimated investment advisor examiner productivity.
FINRA issued a statement after the BCG findings were released, saying, “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.”
The House Financial Services Committee will hold a hearing on June 6 on the redraft of Rep. Spencer Bachus’ bill calling for an SRO to oversee advisors.
On May 25, FINRA released a rebuttal of BCG's findings that also pointed out what FINRA says are inaccuracies that BCG highlighted in its May 10 review of FINRA’s April 25 cost estimates in assuming the SRO role.
FINRA’s point-by-point rebuttal is as follows:
BCG: FINRA’s estimate omits the cost of SEC oversight ($90 million-$100 million) and the cost of enforcement ($60 million-$70 million), both of which are required by the legislation.
FINRA: FINRA did not attempt to estimate the cost of SEC oversight of an IA SRO—FINRA sponsored or otherwise—nor did FINRA purport to have done so. FINRA’s estimates were limited to the investments we believe FINRA would need to make to run an exam program with the parameters described in our estimate. The SEC is the only entity that could provide an insightful estimate of the anticipated cost of SRO oversight of one or more IA SROs. On the second point, BCG is incorrect. FINRA did not omit the cost of enforcement. Enforcement is included and that is clearly stated in the estimate.
The comparison FINRA provided was of BCG and FINRA estimates of ongoing costs excluding estimates for SEC oversight:
Ongoing mandate cost (annual cost excluding SEC oversight)
BCG: $460 million-$510 million FINRA:$150 million–$155 million
BCG: FINRA’s estimate of $12 million-$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 million-$230 million of the difference between the BCG and FINRA estimates.
BCG: 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 million-$170 million of the difference between the BCG and FINRA estimates; and
FINRA: Correct, we are assuming a higher productivity with the estimated population of 14,500 IA firms that could potentially be subject to SRO examinations. This is due in part to the business models of IAs and the rule set to which IAs are subject. As BCG indicated in its own analysis, “IA examinations…are likely to be less resource-intensive, on average, than BD examinations…” Also, the current legislation exempts many of the larger and presumably more complex institutional advisers from SRO examinations.
In addition, BCG misstates FINRA’s current annual exams per examiner ratio for broker-dealers.
FINRA’s ratio was 3.2 for 2010, including work by examiners, examination coordinators and supervisors (2666 cycle exams; 843 examiners, coordinators and supervisors). In the BD regime, of course, large complex firms are not exempted from SRO examinations.
BCG: FINRA’s estimate does not include overhead costs in its estimate of $150 million-$155 million of ongoing annual investment. Overhead costs account for $135 million-$140 million of the difference between the BCG and FINRA estimates.
FINRA: False. FINRA included the overhead costs for examinations and enforcement in its estimate. As stated, the estimate does not include costs for testing, advertising review or dispute resolution. If it is ultimately decided by Congress or the commission that those functions should be included, then the annual ongoing investment would likely be increased by approximately $10 million.
Read Government Watchdog Fights Bachus' SRO Bill on AdvisorOne.