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September 03, 2014 at 11:36 AM
The majority of the more than 32,000 advisors registered with the Securities and Exchange Commission and the states would face little or no extra expense if Congress allowed the SEC to collect user fees to fund exams, according to a just-released analysis by RIA in a Box.
The compliance firm’s analysis notes that the Investment Adviser Examination Improvement Act of 2013, which would allow the SEC to assess a user fee on advisors, would only impact around 11,500 SEC-registered RIA firms which means the majority of firms, which are registered with the states, “would not be impacted at all.”
The annual increased cost to RIA firms for user fee-funded examinations would be around $310 million, with an average cost per firm of $27,013, RIA in a Box estimated in a Wednesday blog post, and firms would pay a higher or lower user fee based on their assets under management.
As the analysis points out, while there a number of exceptions, in general investment advisory firms with $100 million or more in assets under management register with the SEC and firms with less than $100 million in AUM register with the relevant states.
To reach the $310 million figure, RIA in a Box assumed a three-year examination cycle and calculated the number of user-fee funded exams for 2015 to be 2,897, RIA in a Box President G.J. King told ThinkAdvisor. (The SEC performed 964 audits in 2013, and the bill only authorizes fees to fund additional exams.)
Assuming that the main — but not the single — criterion for calculating a firm’s annual user fee is AUM, the compliance firm estimates that with a total incremental annual cost of $310 million and $55 trillion of total AUM across 11,500 firms, the annual cost per $1 million of AUM comes out to $5.65, which means that a firm with $500 million in AUM would pay an annual user fee of $2,824, while one with $2.5 billion in AUM would pay $14,121.
The RIA in a Box analysis strays from the Boston Consulting Group’s estimate in 2011 that RIA firms being audited once every four years would lead to an annual increased cost of $100 million to $110 million.
Neil Simon, vice president of government relations for the Investment Adviser Association, told ThinkAdvisor on Wednesday that while IAA “agrees with several aspects of the new analysis – including the fact that state-registered advisors would not pay user fees and that the legislation pending in the House is designed to provide the SEC with additional resources above its current baseline,” there are “significant differences” between the Boston Consulting Group analysis and the one performed by RIA in a Box.
The different cost estimates “cannot be reconciled even taking into account that BCG based its analysis on a 25% annual inspection rate and RIA in a Box on a 33% annual inspection rate,” Simon said. “We have full confidence in the BCG’s cost analysis.” Further, RIA in a Box’s “calculation of per-firm cost was based solely on AUM, despite the clear language” in the user fees bill stating that “AUM was only one of several factors to be considered by the SEC” in determining the fees charged to individual advisory firms.
“Specifically, the proposed legislation states in part that the user fee formula shall take into account the investment advisor’s size, including the assets under management; the number and types of clients of the investment advisor, and such other objective factors, such as risk characteristics, as the Commission determines to be appropriate,” Simon said.
