December 15, 2011
--- Creating a self-regulatory organization (SRO) to oversee investment advisers could potentially cost twice as much as adequately funding an enhanced Securities and Exchange Commission (SEC) examination program. ---
This was the conclusion of a Boston Consulting Group (BCG) study, commissioned by several financial services organizations, analyzing the costs and funding needs of oversight options for financial advisers.
In a survey conducted by BCG, more than 80% of investment advisers (IAs) said they would prefer to pay user fees to fund enhanced SEC oversight.
Certified Financial Planner Board of Standards, Inc. (CFP Board), the Financial Planning Association (FPA), the Investment Adviser Association (IAA), the National Association of Personal Financial Advisors (NAPFA) and TD Ameritrade Institutional commissioned the study and survey in response to calls for additional analysis of the recommendations in the SEC's study under Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In that study, released in January 2011, the SEC discussed three options for increasing the frequency of IA examinations:
- Authorize the SEC to collect user fees from SEC-registered IAs to fund their examinations;
- Authorize one or more SROs to examine all SEC-registered IAs, subject to SEC oversight; or
- Authorize FINRA to examine dual registrants for compliance with the Advisers Act.
Each of these options would require Congressional action (see “SEC Publishes Report about RIA Oversight”).
BCG's economic analysis of the recommended options in the Section 914 study involved two key components: (1) economics, including setup costs, ongoing costs, and the cost of SEC oversight of an SRO; and (2) level of funding and total potential fees required.
BCG modeled three core scenarios informed by the SEC Section 914 study:
- Enhanced SEC (i.e., the costs associated with an increased level of SEC examinations)
- FINRA-IA SRO (i.e., the costs associated with FINRA developing an IA SRO with an examination and enforcement mandate); and
- New-IA SRO (i.e., the costs associated with creation of an entirely new SRO with an examination and enforcement mandate).
The cost analysis was based on the assumption that IAs would be examined on average once every four years. BCG relied on publicly available data, research, studies, and reports, as well as in-depth interviews with IA firms and former regulatory officials, among others. The SEC and FINRA did not sponsor the study and were not asked to participate in it.