Study Promotes Expanded SEC Oversight, Not New SRO

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:

  1. Enhanced SEC (i.e., the costs associated with an increased level of SEC examinations)
  2. FINRA-IA SRO (i.e., the costs associated with FINRA developing an IA SRO with an examination and enforcement mandate); and
  3. 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.


Key findings of the economic analysis include:

1.    Creating an SRO for IAs would likely cost at least twice as much as funding an enhanced SEC examination program.   

             • A full "Enhanced SEC" examination program is projected to cost $240–270 million per year.

             • In contrast, a FINRA-IA SRO (examination, enforcement, and SEC oversight) is projected to cost $550–610 million per year; and a New-IA SRO is projected to cost $610–670 million per year

2.    Funding an SRO would likely cost IAs at least twice as much as paying user fees to the SEC.   

             • The average annual fee per IA firm is projected to be $27,300 for a full "Enhanced SEC" examination program; $51,700 for a FINRA-IA SRO; and $57,400 for a New-IA SRO.   

             • If the SEC were authorized to collect user fees to fund only the incremental cost to hire additional adviser examiners (including supporting expenses) and not the total costs of an "Enhanced SEC" examination program, the average annual fee is projected to be $11,300, less than one-fourth the fees needed to support an SRO.

             • The actual approach for apportioning the fees to be paid by IA firms will need to be determined.

3.    The cost savings to the SEC of creating an SRO is likely to be minimal because the SEC would need to spend significant resources ($90–105 million) overseeing an SRO.   

4.    The startup costs of an SRO alone ($200–310 million) could fund an enhanced SEC examination program for an entire year ($240–270 million).   

5.    If adopted as currently drafted, the Investment Adviser Oversight Act of 2011 would likely further increase the funding burden on small IAs since approximately 1,800 larger IA firms would be exempt and would not pay membership fees to the SRO.

6.    Shifting primary oversight of dual registrants (those regulated by both the SEC and FINRA) to FINRA is not expected to result in significant costs savings to the SEC.

For more information about the study, visit: