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Republicans Get Tough With SEC Over User Fees

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Industry trade groups remain steadfast in their bid to secure more backers of a bipartisan user-fees bill despite two top GOP lawmakers’ recent directive to SEC Chairwoman Mary Jo White that the agency instead reallocate resources to “immediately” boost the number of advisor exams.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, and Rep. Scott Garrett, R-N.J., chairman of the committee’s Capital Markets Subcommittee, told White in a Nov. 24 letter that user fees “will impose significant new costs” on registered investment advisors and that those “added costs will be passed along to their customers in the form of higher advisory fees.”

User fees, said the two lawmakers—both of whom will continue their leadership roles in the new Congress—could also have a “disproportionate impact” on small and mid-sized RIAs, making it more difficult to compete with larger firms.

“Increasing costs for small businesses and retail investors, and curtailing access to investment advice will directly undermine the SEC’s statutory mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation,” the two lawmakers told White.

What’s more, the two argued that authorizing the SEC to collect user fees would require the agency to hire “hundreds of additional examiners and enforcement lawyers, with six-figure salaries,” which will also increase costs.

The solution, Hensarling and Garrett wrote in their letter, is for the SEC to reallocate existing agency resources “to immediately increase the amount” of RIA exams. They cite their September 2013 request that the SEC redirect resources the agency is using to protect “millionaire and billionaire” investors in private funds and urged the agency to shift “more responsibility” for broker-dealer exams to the Financial Industry Regulatory Authority.

The two lawmakers also suggest that the agency turn to what they term “more creative alternatives,” such as third-party audits, to boost the number of advisor exams, as recommended recently by SEC Commissioner Daniel Gallagher.

Advisor Groups Fight Back

The Financial Planning Coalition—comprising the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA) and the Certified Financial Planner Board of Standards (CFP Board)—said in a statement to me that “we strongly disagree that merely asking the SEC to reallocate its stretched and inadequate resources or outsourcing examinations to third parties is the solution.”

The SEC did, however, get a funding boost in the omnibus spending bill that lawmakers agreed to in mid-December. The omnibus bill allocated $1.5 billion to the SEC, which is $150 million more than the agency got in FY 2014. An SEC spokesperson said that the agency could use those additional funds to help increase its exam coverage.

Neil Simon, VP of government relations for the Investment Adviser Association in Washington, said Hensarling and Garrett’s views regarding user fees aren’t “necessarily shared in the Senate,” and that IAA remains optimistic about “getting movement on [user fee] legislation” in the new Congress.

The Coalition argued that Hensarling and Garrett’s opposition to user fees ignores the “well-documented” Boston Consulting Group economic analysis showing that user fees are the most cost-effective solution to increasing advisor examinations.

What’s more, the House user-fees bill, H.R. 1627, the Investment Adviser Examination Improvement Act of 2013, is supported, the Coalition said, “by the very industry it would affect, has no impact on the American taxpayer and is scalable to address any small business concerns.” The bill was co-sponsored by Rep. Maxine Waters, D-Calif., and authorizes the SEC to assess user fees on advisors.

In Washington, the Coalition stated, “there is a tendency to make complex what should be simple.” The Coalition reiterated its stance that “the simplest and most cost-effective solution” to protect investors is to enable the SEC to increase examinations with the “very strong support of advisors and at no cost to taxpayers.”

The fees assessed on advisors under Waters’ bill would be dedicated to adding staff to the SEC’s Office of Compliance Inspections and Examinations (OCIE), but it remains to be seen if the bill will be reintroduced in the new Congress. Its most prominent backer, Rep. Spencer Bachus, R-Ala., who served as chairman emeritus of the Financial Services Committee, will not be serving in the new Congress.

More Support for User Fees

Waters’ bill gained steady traction in the House last year, securing 25 co-sponsors; Rep. Katherine Clark, D-Mass., was the most recent House member to support the bill, doing so on Sept. 15.

Even the SEC’s Investor Advocate says user fees are a good idea, as he told Congress last August. The SEC, Rick Fleming told Congress, should be allowed to collect user fees to fund advisor exams, because despite the fact that the agency’s national exam program’s spending has increased, the exam division’s budget has been “dwarfed” by the growing number of advisors as well as their complexity, leaving the SEC unable to improve overall exam coverage of advisors.

Fleming said that the number of SEC-registered advisors has grown by approximately 40% over the past decade to nearly 11,500.

What’s more, Fleming said the level of assets managed by investment advisors is on a “steep ascent,” climbing from $20 trillion a decade ago to an estimated $55 trillion by the end of FY 2015.

In comparison, staff in OCIE has grown only about 10% in the past decade, Fleming pointed out.

Garrett and Hensarling gave White a Dec. 5 deadline to tell them how the agency plans to reallocate resources in order to conduct more advisor exams and provide a timeline for the SEC to consider either a “voluntary program, an order or a formal rule to permit third-parties to audit” RIAs. They also called on White to document the average number of investment advisor exams conducted by each SEC examiners across all SEC offices and divisions, for FY 2013 and FY 2014.


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