Reports of the demise of the Securities and Exchange Commission were premature. In the wake of the Madoff scandal, some questioned whether the SEC would survive, but as the financial services regulatory reform debate has unfolded during the past year, those questions largely have been settled in the agency’s favor. With support from Congressional leaders, SEC Chairman Mary Schapiro is implementing initiatives to address shortcomings revealed in the Madoff case. Reading the tea leaves in Washington–where I’ve spent more than 20 years in government, the private sector, and now with the Investment Adviser Association–I’m willing to bet that the SEC will end up with substantial additional resources.
A big bump in SEC resources will directly affect all investment advisors. For starters, it will mean more comprehensive and more frequent SEC inspections. It also will translate into more regulations. The bottom line is that investment advisors should be prepared to face a heightened regulatory and inspection workload in the days ahead.
One reason cited for additional resources is the growth in the investment advisory profession. In recent years, the number of SEC-regulated investment advisors has grown about 30%, from 8,600 in 2005 to more than 11,000 today. But the agency’s budget has not kept pace. As Chairman Schapiro has noted, “beginning in 2005, the SEC faced three consecutive years of flat or declining budgets, the end result being a 10% reduction in its workforce and a cut of more than 50% in its new technology investments.” Several years ago, a key ingredient of the SEC inspection program was to inspect all advisors at least once every five years. Today, it would take 10-11 years to inspect all SEC RIAs.
Historically, the SEC has been funded by annual appropriations from Congress. But there are other ways to increase SEC resources. For example, the House bill passed in December includes no fewer than three approaches, any one of which would be consequential.
What Your Peers Are Reading
Authorization Levels Doubled. The House bill would double SEC appropriations over five years: from $1.1 billion in 2010 to $2.25 billion in 2015. If funded, these provisions would increase total resources for the SEC to unprecedented levels.