By Cyril Tuohy
A bill authorizing the Securities and Exchange Commission (SEC) to increase the number and frequency of exams administered to investment advisors, and to charge advisors a fee to take the tests, received an important endorsement earlier this month but appears to lack support from one key constituency: House Republicans.
Introduced in April, the Investment Adviser Examination Improvement Act of 2013 (H.R. 1627), is sponsored by Rep. Maxine Waters, D-Calif., and Rep. John Delaney, D-Md. Five other Democrats have joined as cosponsors.
Will the bill die in a legislative committee, beaten back by opposition lobbyists and lawmakers fed up by fees levied on their industry? In 1992 and 1993, the House approved similar fee legislation.
Supporters say it is crucial to protecting investors since the SEC doesn’t have the funds to pay for more examiners to police the 11,000 federally registered investment advisors it oversees. Together, those advisors manage as much as $48 trillion in assets.
For all the wealth these advisors control, the typical registered investment advisor (RIA) can expect to be examined only once every 12 to 13 years. The SEC’s annual examination rate of 8 to 10 percent of RIAs a year is not enough, the bill’s proponents say. As many as 40 percent of investment advisors have never been examined.
In a 2011 study, the SEC itself noted the importance of administering more investment examinations, and both former SEC Chairwoman Mary Shapiro and current Chairwoman May Jo White have called for more advisor examinations as a way to protect investors. In November the SEC’s Investor Advisory Committee recommended a user fee.
With the growth in the financial services industry paralleling the growth of self-directed retirement in the past 30 years, the number of investment advisors has also increased. SEC examination capabilities simply haven’t kept up.
The advisor exam fee bill got a major boost early in December when a powerful coalition of consumer and financial advisor groups also urged Congress to support it.
In a letter by Certified Financial Planner (CFP) Board of Standards to Congress, representatives of financial advisor and consumer protection organizations warned that the inability to administer more frequent exams could lead to more incidents of fraud and abuse, which cost investors hundreds of millions of dollars every year.
“We are deeply concerned that the SEC’s current inability to examine investment advisors more frequently increases opportunities for investor fraud and abuse,” the coalition said in the letter circulated in early December.
In addition to the CFP Board, the Financial Planning Association, the Investment Advisers Association, the National Association of Personal Financial Advisors, the North American Securities Administrators Association, the Consumer Federation of America and AARP have come out in support of the bill.
With more investment advisors in the marketplace, SEC regulatory actions against “bad apple” advisors have increased as well. The SEC took action against 140 advisors or advisor companies in the 2013 fiscal year, nearly double the 76 actions taken in 2009, according to SEC data.
In the five-year period ending in 2012, investor complaints received by the Financial Industry Regulatory Authority (FINRA) dropped to 2,785 from 5,405 in 2008. The number of new disciplinary actions filed rose to 1,541 in 2012 from 1,073 in 2008.
There were 294 individuals barred in 2012, down from 363 in 2008, but the 549 individuals suspended last year was far higher than the 321 suspended in 2008, FINRA statistics also show.
The coalition urging support for the bill cites a 2011 study by the Boston Consulting Group that found broad support among advisors for a user fee as “the least expensive of the options set forth” in the SEC study.