RIA Groups Release Study Saying FINRA Oversight Would Cost Twice As Much As Enhancing The SEC's Exam Program Of RIAs

Thursday, December 15, 2011 15:23
RIA Groups Release Study Saying FINRA Oversight Would Cost Twice As Much As Enhancing The SEC's Exam Program Of RIAs

Tags: compliance | Dodd-Frank | FINRA | RIAs | SRO


Creating a new self-regulatory organization run by FINRA would cost at least twice as much as leaving the responsibility to regulate RIAs with the U.S. Securities and Exchange Commission, according to a study funded by four groups representing Registered Investment Advisers.
Enhancing the current SEC program to inspect RIAs would cost $240 million to $270 million a year, according to the study by Boston Consulting Group (BCG), compared with the estimated $460 million to $510 million cost of empowering the Financial Industry Regulatory Authority to create an SRO to examine advisers.
Annual funding for a third option, considered by BCG, the creation of a new self-regulatory organization for investment advisers, would cost between $515 million and $565 million.

The BCG study, along with its analysis and a survey of RIAs, was sponsored by the Certified Financial Planner Board of Standards, Inc., Investment Adviser Association, Financial Planning Association, National Association of Personal Financial Advisors, and TD Ameritrade Institutional.
While the SEC currently has responsibility for oversight and examinations of RIAs with more than $100 million in assets under management, exams are conducted on average less than once a decade.
As required by Dodd-Frank financial reform legislation, the SEC released a study in January 2011 that identified three recommended options to Congress to increase the frequency of examination of SEC-registered RIAs.
With the mood in Washington against adding to the federal bureaucracy, an RIA SRO run by FINRA is being advocated by B-Ds and some consumer groups, including Consumer Federation of America, because FINRA already has experience and infrastructure to regulate and examine financial services firms. However, the four RIA groups have strongly opposed the FINRA SRO option.
The four groups held an hour- long press conference today in New York City. Before the press conference was over, Reuters filed a report quoting a FINRA spokesman who called the cost estimates of creating a FINRA SRO “wildly inflated.”  FINRA added that it was not consulted by BCG in putting together the estimates used in the study.
BCG profiled and modeled three scenarios:
  • Enhance SEC examination capabilities. Achieve an acceptable frequency of IA examinations by hiring additional Office of Compliance Inspections and Examinations ("OCIE") staff, funded by user fees
  • FINRA SRO for IAs. Authorize the Financial Industry Regulatory Authority ("FINRA"), the self-regulatory organization for Broker-Dealers to develop an IA SRO enforcement mandate,4 funded by membership fees, and overseen by the SEC.
  • A new SRO for IAs. A new IA-focused SRO, with an IA examination and enforcement mandate, funded by membership fees, and overseen by the SEC.
The BCG study estimates funding an SRO would cost RIAs twice as much in user fees to the SEC.  The average annual fee per RIA is projected to be $27,300 for a full "Enhanced SEC" examination program versus $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 additional incremental cost to hire more RIA examiners, the average annual fee is projected to be $11,300, less than a quarter of the fees needed to support an SRO.


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Comments (1)

Chris Winn

Thanks for bringing these stats to the forefront.

This is an interesting topic of debate, but there are flaws abound. The analysis and reports all seem to be missing the key point. The way the regulators assess, analyze, and cross-reference risk is flawed. Increasing the frequency of ineffective processes will certainly cost a considerable amount. Changing the players does not target root-cause.

While it is unfortunate that the SEC could not find a way to review more than 9% of firms, getting rid of the firms was not the answer. Nor is replacing the feet on the ground with other ill-equipped feet on the ground.

The only answer should be to re-tool how the checks and balances are implemented with primarily existing resources. That concept seems to have been glossed over somewhere?

With simple and available technology, the SEC could easily implement routine topic-based checks and balances, with minimal cost to advisors. They could increase coverage within a very short time for a fraction of the costs contemplated. However, it seems politics got in the way on this one.

While it is difficult to know whether these figures are accurate or inflated, it is certainly reasonable to believe they are directionally accurate.

The FINRA oversight model is severely broken and not sufficient for the realities of a continually-evolving industry. While it is expected that FINRA would primarily serve as the "feet on the ground" for the SEC in this model, it is fair to say that FINRA should get their own house in order before lobbying for a spot in this equation.

We've already passed the buck enough with SEC to State hand-offs. Hopefully common sense prevails and we fix what we have in place.

On the topic of user fees, that is also a flawed idea. The goal here is to protect the investor, not guarantee them lower performance and higher costs.

As someone entrenched in the RIA market, my experience is that advisors want to be compliant. They want to implement best practices. RIAs want to reduce risk for themselves and their clients.

The unfortunate part is that the regulators are not offering risk management. They are not offering education. They are not coaching advisors. They are not probing and validating risk. The regulators are unfortunately using techniques from the 80's with systems from the 70's while they are still working on cases from the 90's.

Neither "more feet on the ground" nor "different feet on the ground" will improve the control infrastructure. It is time to start re-tooling the process, not the people.
Chris Winn , December 16, 2011

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