Compliance August 31, 2011

Hearing on Regulation of B/Ds and RIAs Set

The question of how broker/dealers (B/Ds) and registered investment advisers (RIAs) should be regulated will be discussed at a hearing on September 13 by a House of Representatives subcommittee.  
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The Capital Markets and Government Sponsored Enterprises Subcommittee (part of the Committee on Financial Services) will hold a hearing about the regulation and oversight of B/Ds and investment advisers on Tuesday, September 13. The Subcommittee will examine studies mandated by the Dodd-Frank Act about the effectiveness of standards of care applicable to B/Ds and RIAs, and the need for enhanced examination and enforcement resources.

At the center of the debate will be the question of “who” – who should be responsible for regulating investment advisers; should the Securities and Exchange Commission (SEC) continue to bear the responsibility, even though its resources are stretched, or should the baton be passed to a self-regulatory organization, such as the Financial Industry Regulatory Authority (FINRA), which has voiced its ambition for the role (see “SEC Publishes Report about RIA Oversight”).

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The House Capital Markets Subcommittee Chairman Rep. Scott Garrett, (R, N.J.) recently introduced the SEC Regulatory Accountability Act (H.R. 2308), which would require the SEC to conduct enhanced cost-benefit analyses on its rules.

On Thursday, September 15, the full Financial Services Committee will hold a hearing about the structure and operations of the Securities and Exchange Commission and the need for reform of the SEC.

Data & Research August 31, 2011

Number of RIAs Declines, Yet Total AUM Increases

An annual report examining SEC-registered investment advisers found that, although the total number of RIAs declined for the first time since 2001, the total assets under management (AUM) rose by nearly 14%.
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The Investment Adviser Association (IAA) and National Regulatory Services (NRS) issued their eleventh annual report, “Evolution Revolution,” examining trends of the investment advisory profession by looking at annual updates filed by investment advisers registered with the Securities and Exchange Commission (SEC). The 2011 report is based on information on file with the SEC as of May 1, 2011.

This year’s report notes that the total number of SEC-registered investment advisers (RIAs) declined from 11,643 in 2010 to 11,539 in 2011. While relatively small, this is the first annual decrease in the number of investment advisers since publication of the report began in 2001. On the other hand, total assets under management (AUM) reported by all investment advisers on May 1, 2011, were $43.8 trillion, representing a 13.7% increase from the $38.6 trillion in AUM reported in 2010. This is the highest level of total AUM ever reported.

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Consistent with previous years, the 2011 report confirms that a relatively small number of large investment advisory firms manage a high percentage of total AUM. The 78 largest advisers (i.e., those that manage $100 billion AUM or more) managed over half (50.9%) of total AUM. Similarly, the 565 advisers with $10 billion AUM or more reported managing 84.4% of all assets.

The report emphasizes that the vast majority of SEC-registered investment advisers are small businesses. In 2011, 81.2% of advisers reported managing less than $1 billion AUM, and 41.3% reported managing less than $100 million AUM. Almost half of all advisers (49.8%) reported fewer than five full- and part-time, non-clerical employees. More than two-thirds of all advisers (68.8%) employed fewer than 10 full- and part-time, non-clerical staff, and more than 9 in 10 (90.6%) employed fewer than 50.

“There will be dramatic shifts in the profile of the investment advisory profession when certain provisions of the Dodd-Frank Act are implemented next year,” said David Tittsworth, Executive Director of the IAA. “It is estimated that about 3,200 smaller investment advisers will switch from SEC to state registration. With the addition of about 700 private fund advisers, we expect that the universe of SEC-registered advisers will shrink to about 9,000, representing a 17% decrease.”

Evolution Revolution examines information the SEC requires investment advisers file annually. This includes information on assets under management, employees, advisory and other business activities, clients, custody, disciplinary history, and other data. Copies of the report may be obtained by contacting IAA or NRS.

A PDF version of the report is available here.

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