Bloomberg News

SEC Cheaper Than Finra for Regulating Advisers, Study Says

December 16, 2011

(Updates with comment from Napfa chair in second-to-last paragraph.)

Dec. 15 (Bloomberg) -- Inspections of investment advisers by the Financial Industry Regulatory Authority may cost at least twice as much as more frequent examinations by the U.S. Securities and Exchange Commission, according to the Boston Consulting Group.

An expanded SEC oversight program is estimated to cost from $240 million to $270 million a year, compared with $550 million to $610 million annually for examinations and enforcement by Finra as well as SEC supervision of Finra, according to the study released today, which was conducted by the Boston-based firm.

BCG was hired by several adviser industry groups, including the Investment Adviser Association, which represents SEC- registered investment advisers, to do the report and an online survey of 424 investment advisers. The study evaluated the costs of three options the SEC recommended in January for improving oversight of advisers. The firm didn’t consult or interview the SEC or Finra for either the report or the survey.

“This is not a debate just about costs,” David Tittsworth, executive director of the Washington-based IAA, said at a press conference after the report was released. “Unlike the SEC, Finra does not have the experience or the expertise to regulate investment advisers.”

The SEC released a report in January recommending three options for strengthening oversight of investment advisers, including levying fees on advisers to fund inspections by the SEC, authorizing one or more self-regulatory organization subject to SEC oversight to examine advisers, and giving Finra, the self-funded regulator for the securities industry, authority to oversee advisers that are also registered as broker-dealers.

‘Wildly Inflated’

“The cost projections in this study of Finra becoming the self-regulatory organization for investment advisers are wildly inflated,” Howard Schloss, executive vice president of corporate communications and government relations, said in a statement. “The fact that the Boston Consulting Group never asked to sit down with Finra or the SEC to discuss projected costs of investment adviser oversight is evidence this study was never a serious attempt to explore costs.”

The study is supported by publicly available data and BCG is “very confident in the analysis and in the findings,” said Gary Shub, a partner with the firm.

Draft Legislation

Congress has been considering authorizing a self regulator to examine registered investment advisers. In September, Representative Spencer Bachus, chairman of the House Financial Services Committee, circulated draft legislation that would charge one or more self-regulatory groups, under the authority of the SEC, with overseeing advisers. The Alabama Republican’s legislation didn’t specify a group that should be chosen.

Formal legislation is planned to be “proposed and ready for committee consideration” in “early spring,” Jeff Emerson, spokesman for the House Financial Services Committee, said in an e-mail.

More than 80 percent of investment advisers said they would rather work with the SEC than with Finra, assuming the fees they pay would be lower with the SEC, according to the BCG survey. About 58 percent of respondents said they would prefer SEC regulation even if oversight by the commission was twice as expensive as oversight by the self regulator.

SEC Experience

“The SEC has had the job for 71 years,” said Skip Schweiss, managing director of advisor advocacy and industry affairs for TD Ameritrade Holding Corp.’s unit that provides custodial and brokerage services to advisers. “I don’t think anybody would posit that the SEC has done a perfect job every day of those 71 years, but they’re good at it, they’ve done it a long time, and I know they’re working hard to standardize and streamline their examination process.”

The BCG report isn’t the first time advisers have said they prefer the SEC.

“Continued and enhanced SEC oversight allows current policy to continue without interruption,” Susan John, chair of the National Association of Personal Financial Advisors, said in a press release after the SEC report came out in January. “A change in this policy could have unneeded and problematic consequences.”

Napfa, which is a membership group for advisers who don’t charge commissions, also hired BCG to do the study, along with the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and TD Ameritrade Institutional.

Frequency of Inspections

The average registered investment adviser is reviewed by the SEC less than once every 11 years given the current rate of examinations, according to the January SEC report. The BCG study assessed the costs of increasing the frequency of visits to once every four years.

“We look forward to reviewing the report,” John Nester, a spokesman for the SEC, said in a statement.

Richard Ketchum, chairman and chief executive officer of Finra, told a subcommittee of the House Financial Services Committee in September that giving the SEC the authority to designate a self regulator would be “the most practical and efficient way” to improve oversight of advisers.

“Given our experience operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem,” Ketchum said in prepared remarks.

Cost Differences

Setup costs for making Finra the overseer of advisers were estimated to be from $200 million to $255 million, compared with $6 million to $8 million for the SEC, the BCG report said. The study assumed Finra would need to create a separate unit to handle the adviser reviews.

Estimated ongoing costs were higher for Finra in part because the study included enforcement costs in its estimate of annual expenses and didn’t include enforcement costs in its estimate of ongoing costs for the SEC. Annual expenses for Finra regulation also included the cost of SEC oversight of the self regulator, which may be $90 million to $100 million a year.

“None of us are really excited about paying user fees,” Napfa’s John said at the press conference today. “It really has to do with appropriate regulation and experience of examiners.”

There were about 11,888 federally registered investment adviser firms managing about $38.3 trillion in 2010, according to the SEC report. The number of advisers has increased by about 39 percent from 2004 when there were 8,581 advisers managing about $24.1 trillion. Registered investment adviser firms provide advice to investors including individuals and institutions.

--Editors: Alexis Leondis, Rick Levinson.

To contact the reporter on this story: Elizabeth Ody in New York

To contact the editor responsible for this story: Rick Levinson at

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