The Big Question for 2012: Who Will Regulate Investment Advisers?

investment adviser complianceIt is likely that investment advisers will see more rule changes in 2012. In fact, investment advisers (IAs) may even end up with a new regulator if lawmakers follow their current path.

At this point, Congress is still debating how best to strengthen adviser oversight. As we mentioned in a previous post, investment advisers are currently only examined every eleven years by the Securities and Exchange Commission.

To step up supervision, several proposals are being considered. In a Congressionally mandated study, released in January 2011, the SEC discussed three options for increasing the frequency of investment adviser examinations:

  • Authorize the SEC to collect user fees from SEC-registered IAs to fund their examinations;
  • Authorize one or more self-regulatory organizations (SROs) to examine all SEC-registered IAs, subject to SEC oversight; or
  • Authorize FINRA to examine dual registrants for compliance with the Advisers Act.

The Debate

At this point, there is no consensus on the best way to proceed. Congress appears to be leaning towards examination by an SRO. In September, Representative Spencer Bachus, chairman of the House Financial Services Committee, circulated draft legislation that would charge one or more SROs, under the authority of the SEC, with overseeing advisers. A formal proposal is expected this spring.

However, advisers are strongly opposed to this approach. In fact, according to a new study by the Boston Consulting Group (BCG), more than 80% of advisors surveyed said they would prefer to pay user fees to fund enhanced SEC exams.

Eighty-one percent of advisors prefer an enhanced SEC exam model over FINRA as an SRO, while 75% of advisors said they would prefer a new SRO over FINRA even if it cost them more, the report found.

Given the significance of this issue, we will provide updates as new developments arise.

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