A group of organizations with Investment Adviser stakeholders engaged the Boston Consulting Group to conduct an economic analysis of IA oversight scenarios (.pdf) in the Securities and Exchange Commission’s study released in January 2011. The analysis came down solidly in favor of increased funding of the SEC as the solution for increased oversight of investment advisers.
BCG looked at the three options in the SEC’s 914 study: (1) enhancing the SEC’s ability to oversee advisers (2) allowing FINRA to oversee RIAs and (3) creating a new IA-only SRO. The first option was examined in two segments: (a) giving the SEC enough examiners to do the job and (b) full resources. The costs represented what it would take for each option to examine every registered investment adviser firm at least once every four years.
Estimates from BCG study of costs for 3 top choices for examining RIAs
| Topic | Enhanced SEC | FINRA | New IA SRO |
| Annual cost per RIA | $11,300-$27,300* | $51,700 | $57,400 |
| Set-up costs | $6m-$8m (Increasing OCIE) | $200m-$255m | $255m-$310m |
| Set-up time | 6-12 months | 12-18 months | 18-24 months |
| Mandate costs from fees | $100m-$270m | $460m-$510m | $515m-$565m |
| SEC Oversight of SRO | $0 | $90m-$100m | $95m-$105m |
| Total annual costs | $100m-$270m | $550m-$610m | $610m-$670m |
The study provides some interesting insight as to staffing. The average examiner productivity is assumed to be 3.0 examinations per examiner per year, based on the five year SEC average of 3.0 IA examinations per examiner per year.31 In order to achieve an average examination frequency of once every four years, with examiner productivity of 3.0 examinations per examiner per year, 787 examiners are required.
The parties who requested the study are the Investment Adviser Association, Certified Financial Planner Board of Standards, the Financial Planning Association, the National Association of Personal Financial Advisors and TD Ameritrade Institutional in commissioning the study.Given that the vast majority of investment adviser firms do not want FINRA as their regulator/examiner it should come as no surprise as to the results of the study.
I expected to see the additional costs of SEC oversight of an SRO. It’s a bit unfair that the SEC costs are only for examination and not enforcement. The SRO figures include that additional cost.
It should also come as no surprise that FINRA disputed the findings. Rumor has it that they are pushing hard to become the SRO for investment advisers.
In any event, it will take legislation from Congress to implement any of these scenarios. The typical Congressman’s knee-jerk reaction to this seems to be “Madoff.” That does not bode well for increased resources for the SEC.
Sources:
- Investment Adviser Oversight: Economic Analysis of Options (.pdf) by the Boston Consulting Group
- Advisory firms would pay twice as much with Finra as regulator: Study by Mark Schoeff Jr.in Investment News
- RIAs would pay nearly double annually if FINRA were their SRO, study claims in IA Watch (subscription required)
- SEC Study on Enhancing Investment Adviser Examinations – prior post on Compliance Building