Advisor SRO Would Cost Twice as Much as Funding SEC Exams

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).