Heightened Examination Will Come at a Higher Cost for Investment Advisers

investment adviser complianceAs we mentioned in our last post, increased adviser oversight is likely on the horizon. While we will still don’t know what form it will take, a new report suggests that it will likely come at a higher cost for registered investment advisers.

The Boston Consulting Group was recently asked by several adviser industry groups to analyze the costs of the three options the SEC recommended in January for improving oversight of advisers. The study found that creating a self-regulatory organization (SRO) to oversee investment advisers (IA) would likely cost at least twice as much as adequately funding an enhanced Securities and Exchange Commission (SEC) examination program.

Below are a few other noteworthy findings:

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

Not surprisingly, the results of the study are being widely criticized, particularly by FINRA. “The cost projections in this study of FINRA becoming the self-regulatory organization for investment advisers are wildly inflated,” Howard Schloss, executive vice president of corporate communications and government relations, said in a statement.

Meanwhile, BCG stands by its findings, pointing out that they are supported by publicly available data.

Source: Bloomberg

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