Pandemic Shows Business Needs Less Regulation and More Oversight

In my experience, most broker-dealers are examined annually by FINRA, which helps explain why in 2018 it collected $61 million in fines and $25.5 million in restitution for investors. It also expelled 16 member firms and barred almost 400 individuals from the securities business while also referring 919 fraud and insider trading cases for prosecution.

On the other hand, there is no SRO for RIAs who are regulated by the SEC and the states in which they do business. They are subject to regulation written by politicians and government bureaucrats who may not have any firsthand experience in financial services, which helps explain why so many regulations don’t really make any sense — they don’t do anything for the public, but make life more difficult and expensive for the industry.

RIAs are the fastest growing segment of financial services, increasing more than 23% since 2010 (from 10,511 in 2010 to 12,993 last year) and currently managing about $84 trillion in client assets. Yet despite these numbers there appears to be insufficient oversight of the practitioners. There are RIA firms that have not seen an SEC examiner in more than a decade. And in many cases, no visitors from the state, either.

In any given year, the SEC examines 15% of registered RIA firms (2,180 examinations in fiscal 2019), which is supposed to give them a clear picture of what’s happening around the industry. On average, more than 70% of the firms examined are found to have deficiencies, although only a small percentage are serious. Since only a small percentage of the deficiencies are serious enough to warrant enforcement, there are probably too many regulations to begin with, and since almost every firm has deficiencies there’s obviously insufficient oversight.

I’m not saying the SEC should conduct annual exams, but no firm should go more than five years without someone making an examination. In its list of 2020 exam priorities, the SEC’s Office of Compliance Inspections and Examinations (OCIE) said it “will continue to conduct risk-based examinations of RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined.” That’s an admirable goal, but the agency has neither the budget nor the manpower to carry it out.

And, as with FINRA, when the SEC does take enforcement action the penalties are often disproportionate. The largest firms with the most egregious violations may get hit with enormous fines that barely impact firm profitability while smaller firms are hit with fines that can put them out of business.

Right now, financial services businesses are being handcuffed by unnecessary and ineffective regulations that fail to serve the interests of either consumers or industry. A more sensible approach would be massive deregulation coupled with real oversight. We have too much regulation and not enough oversight, when what is really needed is the opposite.

Ed Cofrancesco is founder and CEO of International Assets Advisory.