IAA Tag Archives — RIA Compliance Blog

User Fee Supporters Gaining Momentum

June 26, 2012 | Steve Parker

According to an InvestmentNews poll, 58.7% of 293 advisers who responded to a recent survey support the option of the Securities and Exchange Commission (SEC) charging user fees to defray the costs of increased examinations. This is an increase from a year ago when only 27.8% of 335 responding advisers supported the user fee approach. The poll also concluded that 74.7% of advisers said they oppose permitting the Financial Regulatory Authority (FINRA) from becoming the self regulatory organization (SRO) for advisers.

The increased willingness of advisers to pay user fees suggests that there could be more support for the bill soon to be introduced by Rep. Maxine Waters (D-CA) that would authorize the SEC to charge user fees for advisers to cover or defray the costs of examinations. Rep. Waters’s bill would combat the SRO bill introduced by Rep. Spencer Bachus (R-Al) and Carolyn McCarthy (D-NY).
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GAO Claims SEC Oversight of FINRA is Insufficient; SRO Hearing is This Week

June 5, 2012 | Steve Parker

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Government Accountability Office (GAO), a non-partisan investigative agency of Congress, conducted a study which criticized the Securities and Exchange Commission’s (SEC) oversight of the Financial Industry Regulatory Authority (FINRA). The purpose of the study was to determine how the SEC has conducted its oversight of FINRA, including the effectiveness of FINRA rules, and how the SEC plans to enhance its oversight.

The GAO found that both the SEC and FINRA do not conduct retrospective reviews of the impact of FINRA’s rules. As a result, the GAO believes that “FINRA may be missing an opportunity to systematically assess whether its rules are achieving their intended purpose and take appropriate action, such as maintaining rules that are effective and modifying or repealing rules that are ineffective or burdensome.” The GAO also noted that the SEC does not conduct sufficient oversight over FINRA’s governance and executive compensation. The SEC has responded to the survey by saying that it is focused primarily on oversight of FINRA’s regulatory departments, which the SEC claims has the biggest impact on investors.
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SRO Redraft Bill Reintroduced

April 26, 2012 | Steve Parker

House Financial Services Committee Chairman Spencer Bachus (R-AL) has reintroduced his bill calling for a self-regulatory organization (SRO) for investment advisers. The bill has a Democratic co-sponsor, Rep. Carolyn McCarthy (D-NY), indicating that it may have some bipartisan support. Rep. Bachus said that the bill was drafted in response to a Securities and Exchange Commission (SEC) study which showed that the SEC does not have sufficient resources to adequately monitor and regulate the 12,000 registered investment advisers. The SEC examined only 8% of advisers in 2011, which is significantly less than the 58% of broker-dealers that were examined.

The bill calls for the creation of one or more SROs which would be called a “National Investment Adviser Association” (NIAA). NIAA would report to the SEC, and investment advisers with retail customers would be required to become members. The bill provides an exception from the membership requirement for investment advisers with less than $100 million in assets under management. The bill gives individual states the authority to regulate those investment advisers as long as the states conduct periodic on-site examinations.
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IAA Becomes More Outspoken as SRO Bill Redraft Nears

March 26, 2012 | Steve Parker

The Investment Advisers Association (IAA) believes that it needs to become more outspoken and involved in order to deter Congress from passing legislation requiring a self-regulatory organization (SRO) be designated for registered investment advisers. The IAA is concerned because Congress is fully aware of the Financial Industry Regulatory Authority’s (FINRA) position and its desire to become the SRO for investment advisers. IAA vice president for government relations Neil Simon stated, “Despite our best efforts, there is still a woeful ignorance of the role investment advisers play. They’re aware of FINRA. We need to help educate policymakers so they make informed decisions.”

Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Securities and Exchange Commission (SEC) prepare a report considering whether there should be an SRO for investment advisers, as there is for broker-dealers. The SEC set forth three possible models to help the agency better oversee advisers: (1) allow the SEC to charge user fees for exams, (2) establish a new SRO, or (3) allow FINRA to be the SRO for both registered investment advisers and broker-dealers. The IAA is supporting the user fee approach, while FINRA is aggressively pursuing becoming the designated SRO. House Financial Services Committee Chairman Spencer Bachus (R-Ala) previously offered a bill which would provide for an SRO in response to the SEC’s recommendations, which were delivered to Congress in January 2011. Some industry observers believe that Rep. Bachus is likely to release a revised discussion draft of his bill and push it, because he will leave his post of Financial Services Chairman in January 2013 due to term limits.
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SEC Experts Warn of Possible Enforcement Actions Against CCOs

March 21, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) is taking an increased interest in examining chief compliance officers (CCO) to determine whether enforcement action should be taken against them. At the Investment Adviser Association’s annual compliance conference, CCOs were given a number of stern warnings. Director of the SEC’s Division of Investment Management Robert Plaze spoke about changes and improvements being made by the SEC. He warned CCOs that a newly created Asset Management Unit, which is part of the Division of Enforcement, “is dedicated to suing you.” He also claimed that the new unit will be staffed with people who understand the asset management business. It will also collaborate with both the Investment Management Division and the agency’s Office of Compliance Inspections and Examinations. Mr. Plaze stated that the unit will make the SEC’s oversight of registered investment advisers more efficient, allowing it to be able to perform more effective examinations. These warnings should concern CCOs who have taken a supervisory role within their firm.

The SEC has the authority to impose sanctions on people who are associated with a broker-dealer or an investment adviser if those people have reasonably failed to supervise. Both broker-dealers and investment advisers employ legal and compliance personnel to provide advice to them and their firms regarding the application of laws and regulations. One major issue that arises is whether the CCO is considered a supervisor within the firm. If so, the CCO could be subject to sanctions by the SEC for failure to supervise.
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Obama’s New Proposed Budget Seeks Increased SEC Funding

February 22, 2012 | Steve Parker

The Obama administration released a proposed budget last week that will boost the Securities and Exchange Commission’s (SEC) budget for the next fiscal year. The SEC claims the need for an increased budget stems from the mandatory creation of 100 rules which is required by the Dodd-Frank Act and the need to hire new examiners to regulate the market more efficiently. The proposed budget would increase the SEC’s funding by 18.5 percent from $1.32 billion to $1.57 billion.

Prior to the release of the Obama administration budget, the SEC submitted a budget request which stated that the new budget would allow for 222 new examiners. That request estimated that in 2013 it will be responsible for examining 10,000 advisers with $44 trillion in assets under management. Currently, it only has 10 examiners per $1 trillion in assets under management, a decrease since 2005 when it had 19 examiners for every $1 trillion in assets under management. The SEC is capable of reviewing only eight percent of registered advisers each year. Investment advisers have also shown a preference to be regulated by the SEC as opposed to FINRA or another self regulatory authority (SRO), as we discussed in a previous blog, BCG Report Claims FINRA Cost Will Exceed SEC Cost as RIA SRO.
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