SEC Proposal Indicates Wide Range in Costs

A Securities and Exchange Commission proposal requiring financial advisors to implement written business continuity and transition plans will saddle advisors with average one-time costs ranging from $30,000 to $1.5 million.

The costs would pay for developing internal policies and procedures related to separate components of business continuity and transition plans, the SEC said. Also, integrating and implementing policies and procedures with technology systems and platforms within the firm.

In addition, annual ongoing costs would range on average from $7,500 to $375,000, the SEC estimated.

Ongoing costs would be related to the advisor’s review of a business continuity and transition plans, the SEC said.

The vast spread in average one-time costs among advisors is due to an advisory’s size, scope of operations, how far along they are with their existing continuity plans and the complexity of their systems, the SEC said.

Some of the costs incurred by advisors might be passed on to clients and investors through higher fees, the agency added.

About 12,000 SEC-registered investment advisors operate under the Investment Advisers Act of 1940 and the proposed changes do not apply to state regulated insurance agents.

Cost Estimates Vary Widely

Cost numbers represent an average among all the advisors registered with the SEC, but some advisors manage tens of billions of dollars through complex, far-flung systems, while smaller advisors will pay much less.

Initial one-time costs for small SEC-registered advisors with $25 million or less in assets under management would come to $12,515, or if spread out over a three-year period, to $4,172 a year, the SEC estimated.

In addition, small advisors would have to pay fees or hourly rates to outside experts – lawyers and consultants – in connection with those one-time costs. Those fees are estimated at $4,000, or $1,333 a year over three years, the SEC said.

Annual ongoing costs for small advisors are estimated at 25 percent of the initial cost, the SEC said.

Changes to the Advisers Act are necessary because spot checks by SEC investigators over the past two years have revealed that not all advisors are equally prepared to handle risks facing an advisory firm, regulators said.

Risks include technological failures with respect to systems and processes, data breaches, the death of an agency principal and the inability of clients to have access to their advisor’s physical location, according to the SEC.

Advisors who hold themselves out as providing advice without taking the necessary steps to protect client interests from being placed at risk is tantamount to fraud, the SEC said.

More than $67 trillion in assets is managed by advisors of all sizes.

Industry: SEC Lowballing Cost Estimates

Industry officials say the costs of changes to the Advisers Act is far more than the SEC lets on.

Timothy W. Cameron, head of the Asset Management Group with the Securities Industry and Financial Markets Association, said in a letter to the SEC last month that “No large financial institution spends a mere $375,000 on such efforts annually." The actual number is “likely multiples of that amount,” he added.

The opportunity costs associated with the changes means that many advisors will be forced to forsake new business opportunities, he said. Advisors are already dealing with low interest rates and fee compression.

“Especially for smaller advisers that may be struggling to be or remain profitable, that may man cutting back on other important initiatives or bypassing business that might be viable with investments in additional staff, systems or expertise,” Cameron wrote.

Other industry groups have faulted the SEC for proposing that advisor business continuity plans be made public and for asking too much of transition plans.

No business continuity or transition plan can “absolutely guarantee that advisory services will not be interrupted,” said Tom Quaadman, executive vice president of the Center for Capital Markets Competitiveness, an advocacy arm of the U.S. Chamber of Commerce.

Any suggestion that a disruption in the service provided by an advisor to clients is tantamount to fraud is not appropriate, he added in a letter to the SEC.

Two Changes to the '40 Act

The SEC’s proposed changes to the Adviser’s Act would come in two forms. The first would be a new rule 206(4)-4, for which the bulk of the business continuity plan costs would have to pay.

Under this rule, SEC-registered investment advisors could only provide investment advice if the advisor adopted and implemented a written business continuity and transition plan reviewed at least annually.

The second change would come in the form of amendments to rule 204-2 in the Adviser’s Act, a far less costly change.

Proposed amendments to 204-2 would require advisors to keep copies of all written business continuity and transition plans in effect at any time during the last five years, as well as records documenting the advisor’s annual review of its business continuity and transition plans.

SEC officials are reviewing the comments from industry after the close of the public comment period last month.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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