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

 

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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