The Financial Services Institute (FSI) applauds the hard work of the Securities and Exchange Commission (SEC) staff given their time and resource constraints to complete the study on enhancing investment advisor examinations mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
We commend the Commission for identifying options to solve the very real problem of inadequate examination and enforcement resources for investment advisors. We wholeheartedly agree with and support Commissioner Elisse Walter's assessment of the magnitude and urgency of the problem.
The SEC provided three options for Congress to consider, including:
- Authorizing the Commission to impose user fees on SEC-registered investment advisors to fund their examinations by the Office of Compliance Inspections and Examinations (OCIE)
- Authorizing one or more self-regulatory organizations (SRO) to examine, subject to SEC oversight, all SEC-registered investment advisors; or
- Authorizing FINRA to examine dual registrants for compliance with the Investment Advisers Act of 1940 (Advisers Act)
We believe that the only option that addresses the serious regulatory gap that exists today is the authorization of an SRO to examine all SEC-registered investment advisors. As long as some providers of retail financial advice are subject to vigorous oversight and examination and others are not, investors are at risk. The SRO option will close the regulatory gap.
Further, industry input into the SRO's rulemaking process will ensure that regulators protect the investing public while also considering negative unintended consequences. An SRO for investment advisors is an essential part of any serious effort to enhance investor protection.
FSI endorsed FINRA as the SRO for registered investment advisors in late December 2010. FINRA has extensive knowledge of the overlapping nature of financial services offered by broker-dealers and investment advisors. Additionally, FINRA has experience in performing regulatory examinations of financial service providers and has experience operating an SRO whose structure is designed to ensure its governing body, committees and staff act in the public's best interests.
As it stands today, given the large budget and staffing shortfalls noted in both the SEC's study and Commissioner Walters's statement, the average investment advisor can expect to be examined only once every 11 years. The existence of a well-funded, experienced self-regulatory authority, such as FINRA, would allow for more frequent investment adviser examinations.
