Legislative Agenda

 

Learn More

Core Principle Four

Regulation of Investment Advisers is an Inherently Public Function that Should be Performed by Government Regulators, not Outsourced to an Industry Self-Regulatory Organization

 

  • NASAA Vigorously Opposes the Creation of an SRO for State Regulated Investment Advisers

  • Congress Should Authorize the SEC to Assess “User-Fees” to Fund Improved Oversight of Federally Registered Investment Advisers

Since the passage of NSMIA in 1996 and the Dodd-Frank Act in 2010, the division of federal and state regulatory responsibility over investment advisers has been clearly delineated according to the amount of investors’ assets under management. NSMIA bifurcated regulatory responsibility between the states, which were given authority to oversee investment advisers with up to $25 million in assets, and the SEC, which oversaw all other investment advisers. In 2010, the Dodd-Frank Act acknowledged the important and successful role states play in investment adviser regulation and increased the states’ regulatory responsibility by transferring to them oversight of mid-sized investment advisers—those with assets under management between $25 million and $100 million.

From the perspective of states securities regulators, this division of state and federal regulatory responsibility for investment advisers has worked very well. States have robust and dynamic regulatory oversight programs. States, unlike the SEC, regulate both investment advisers and investment adviser representatives. Almost every state performs on-site examinations, on a routine and for-cause basis, often using sophisticated examination modules. And the majority of states conduct examinations on average at least once every four years.

In contrast to the states’ experience regulating small and mid-sized investment advisers, in the post-NSMIA era, the SEC has struggled to adequately examine the large federally registered investment adviser firms for which it is responsible. The problems that exist with the SEC’s oversight of federally registered investment advisers have been characterized as a “regulatory gap.” NASAA recognizes that this gap places investors at risk, and strongly believes that Congress should address it by providing the SEC with the resources to do the job, or a mechanism to gain these resources, and not outsource the responsibility to an industry-funded self regulatory organization (SRO). NASAA urges the 113th Congress to reject proposals to establish additional SROs, and instead to enable federal regulators with the resources they need to effectively monitor the firms and representatives under their jurisdiction.

 

NASAA Vigorously Opposes the Creation of an SRO for State Regulated Investment Advisers

When it comes to the regulation of investment advisers, government regulators have decades of experience that is unmatched by any other authority or entity. NASAA sees little benefit in constructing and imposing a new layer of bureaucracy, with its attendant, well-documented expenses. The goal is to strengthen investor protection by improving the oversight of SEC-regulated investment advisers, and the best way to do this is to adequately fund federal regulators.

The existing securities industry SRO model—as typified by FINRA—also lacks accountability and is replete with conflicts of interest. Even where there is an independent Board of Directors, SROs remain organizations built on the premise of self-rule and are, as a matter of first principle, accountable to their members, not the investing public. Indeed, the Section 914 of the Dodd-Frank Act study (the 914 Study) underscored this point when it noted that an SRO containing “industry representatives” in its governance structure could have an elevated vulnerability to industry capture. No matter how many safeguards are instituted, an SRO lacks accountability and has substantial and inherent conflicts of interest that governmental regulators do not.

SROs also are more costly and inefficient than direct government oversight. For example, the establishment of an SRO for investment advisers would create a duplicative regulatory structure, with the SEC being responsible for the oversight of the SRO, and the SRO in turn being responsible for the oversight of investment advisers. Thus, establishing an SRO will likely be more expensive, both initially and over the long-term, than funding a more robust SEC to oversee the industry. Indeed, according to an independent analysis performed in 2011 by the Boston Consulting Group, the start-up costs of an SRO for investment advisers alone would be sufficient to fund an enhanced SEC examination program for an entire year.

Finally, aside from structural concerns raised by legislation establishing an SRO for investment advisers, most state-registered investment advisers are small businesses employing only a few people. The majority of their clients are not wealthy individuals or institutions, but hard-working Americans trying to plan for retirement or their children’s education. State securities regulators are extremely concerned about the impact that legislation requiring investment advisers to join an SRO would have on state-registered investment advisers and their clients. In short, any legislation that would require small and mid-sized investment advisers to join an SRO has the very real potential to be a job killer.

 

Congress Should Authorize the SEC to Assess “User Fees” to Fund Improved Oversight of Federally Registered Investment Advisers

State securities regulators continue to believe that best way for Congress to improve the oversight of federally registered investment advisers is to provide the SEC with the resources it needs to do the job. Unfortunately, the SEC still lacks the necessary funding to adequately oversee the investment advisers it regulates.

Recognizing current political realities, NASAA believes that the most efficacious way for Congress to improve the oversight of federally registered investment advisers is to enact legislation authorizing the SEC’s Office of Compliance Inspections and Examinations (OCIE) to collect user fees from the investment advisers it examines. The revenue derived from such user fees, which would not come at any cost to taxpayers, could then be used by OCIE to fund additional examinations of federally registered investment advisers.

As a matter of efficiency and cost, authorizing the SEC to fund enhanced oversight of federally registered investment advisers through the imposition of user fees also makes more sense than establishing a new SRO for investment advisers. Specifically, imposing user fees would be a less expensive option because the SEC would not have to spend significant resources in overseeing an SRO. Indeed, the 914 Study acknowledged the high costs of coordination between the SEC staff and an SRO “which might include, for example, not only direct costs like additional management costs required to oversee the SRO’s effectiveness, but also other costs that are even more difficult to quantify.”

The 914 Study’s conclusion has been echoed by investment adviser firms and validated by independent analyses. For example, the study conducted by the Boston Consulting Group, referenced above, found that establishing an SRO for investment advisers would likely cost at least twice as much as funding an enhanced SEC examination program. The same study found that the startup costs of an SRO alone ($200–310 million) could fund an enhanced SEC examination program for an entire year ($240–270 million).

In the 112th Congress, NASAA was pleased to support The Investment Adviser Examination Improvement Act, sponsored by Rep. Maxine Waters (D-CA), which would have authorized the SEC to assess user fees on investment advisers to fund an expansion of its adviser examinations. As revenue from the user fees contemplated by the bill would have been available to the SEC only to fund additional examinations of investment advisers, and not to subsidize other functions of the Commission, the proposed bill would have been highly cost-effective not only from the perspective of the government, but also from that of the investment adviser industry. In the 113th Congress, state securities regulators will continue to strongly support and advocate for the enactment of The Investment Adviser Examination Improvement Act or similar legislation.