December 15, 2011 / 6:16 PM / 6 years ago

More SEC adviser exams seen cheapest oversight option

(Reuters) - Creating a self-regulatory organization to examine U.S. investment advisers would cost at least twice that of ramping up exams by the U.S. Securities and Exchange Commission, according to a study released on Thursday.

The study, conducted by Boston Consulting Group (BCG), analyzed the costs of three options for developing a more effective examination program for SEC-registered advisers, which were first put forward in an SEC report to Congress in January.

“We have a real interest in making sure that regulation is appropriate and that consumers are protected,” said Susan John, chair of the National Association of Financial Advisors, one of four industry groups representing registered investment advisers (RIAs) that commissioned the study.

Others included the Investment Adviser Association and Certified Financial Planner Board of Standards. TD Ameritrade’s institutional unit was also a sponsor.

“If consumers don’t have confidence, that’s less customers for us,” John told reporters in New York.

The BCG study found that an “enhanced” examination program through the SEC, potentially funded by “user fees” paid by advisers, would cost up to $270 million a year, compared with annual funding for a new self-regulatory organization for advisers of between $515 million and $565 million.

The third option, in which the Financial Industry Regulatory Authority would examine advisers, would cost between $460 million and $510 million per year.


FINRA, the self-regulatory group for brokers, has been lobbying to also become a self-regulatory organization (SRO) for advisers. It shot back that BCG’s cost projections related to FINRA becoming a SRO for advisers were “wildly inflated.”

“The methodology is flawed and not clearly explained,” FINRA spokesman Howard Schloss said in a statement. “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.”

James Fanto, a securities law professor at Brooklyn Law School in New York, also found fault with the fact that BCG did not interview the SEC or FINRA while researching the issues. “I‘m skeptical about the results,” he said.

But BCG stood by its report, which did not recommend one option over another, saying that there was ample available data and research to support its findings.

“We are very confident in the analysis and with the findings that came out of the analysis,” Gary Shub, a partner with BCG, told reporters in New York.

“We would expect future dialogue with FINRA and the SEC and we wanted to come to that future dialogue with a robust fact base and a robust understanding.”


Advisers, have generally opposed a move toward self-regulation, arguing in favor of SEC oversight.

A BCG survey of 424 registered investment advisers, also released Thursday, found that about 80 percent would prefer oversight to stay with the SEC, which could be funded by user fees, instead of FINRA.

The SEC has been in charge of oversight for advisers for the last 71 years and knows how RIAs operate, whereas FINRA could take a while to get up to speed and create extra layers of bureaucracy, said Skip Schweiss, managing director of advisor advocacy and industry affairs at TD Ameritrade Institutional.

“I don’t think that anybody would posit that the SEC has done a perfect job every day of those 71 years, but ... they’re working hard to standardize and streamline their examination process, and I think that they’re in the best position to get it exactly right,” he said.


Brooklyn Law School’s Fanto questioned the SEC’s ability to take on the role of examining advisers as frequently as every four years, as suggested by the study, as opposed to roughly every 11 years now.

The SEC has long argued that it does not have adequate financial resources to examine advisers. It came under attack for failing to detect Bernard Madoff’s Ponzi scheme which came to light in late 2008.

The SEC, which has not yet reviewed the report, will be responsible for examining 9,440 investment advisers in 2012, according to BCG.

Beefing up the SEC’s current examination program would be the fastest and most cost-effective option to launch, according to the study.

The effort would require hiring additional examiners, which could be completed within six to 12 months, and cost an estimated $6 million to $8 million. Setting up a new self-regulatory group could take as long as two years and cost up to $310 million, it said.

Additional reporting by Sarah N. Lynch and Editing by Bernadette Baum

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