For the registered investment advisors (RIAs) that comprise AdvisorOne's Top Wealth Managers, much is changing in 2011. As regulators continue to put in place the provisions of the Dodd-Frank Act that affect individual investors, there are a few that undoubtedly will affect Top Wealth Managers—really all RIA firms.
Uncertainty about regulation affecting RIAs is a concern for many of the Top Wealth Managers—in fact, about 30% of the Top Wealth Managers cited regulation or compliance uncertainty and costs as one of their top three firm risks in the Top Wealth Managers Annual survey. Already, RIAs are changing the way they provide information to the Securities and Exchange Commission (SEC) and the public to accommodate the requirements in the new SEC ADV Part 2.
Who or What Will Regulate RIA Firms?
Perhaps no potential new regulation will affect RIA firms more than how this question gets answered: Who will regulate RIA firms? SEC staff published its Study on Enhancing Investment Adviser Examinations in January. The study, frequently referred to as the SRO Study, has three recommendations for Congress regarding RIA oversight, to "strengthen the Commission's investment adviser examination program:"
"(1) Authorize the Commission to impose user fees on SEC-registered investment advisers
to fund their examinations by OCIE;
(2) Authorize one or more SROs to examine, subject to SEC oversight, all SEC registered investment advisers; or
(3) Authorize FINRA to examine dual registrants for compliance with the Advisers Act"
The SRO Study notes that because of resource issues, average examination frequency for RIAs has declined in recent years, pointing out that, "At the rate that registered investment advisers were examined in 2010, the average registered adviser could expect to be examined less than once every 11 years, compared to approximately once every six years in 2004." To make matters more severe, the SEC expects that larger RIA firms with $100 million or more in assets will grow over the next five to 10 years. See related article: "SEC SRO Study Projects High Growth Rate for Large RIAs."
State Registration for Thousands of RIAs
The SEC has already put in place a requirement that nearly all RIAs with less than $100 million in assets under management (AUM), register with state regulators rather than the SEC. Of the 11,888 RIAs that were registered with the SEC in 2010, about 3,350 of them will have to register with state regulators instead.
The issue is, in large part, about adequate funding for the SEC. As SEC Commissioners Elisse B. Walter (left) and Luis A. Aguilar, as well as Chairman Mary Schapiro have articulated many times, the SEC needs to keep more of the revenue it takes in as fees (and turns right over to the Treasury), in order to complete its mission and new mandates resulting from the Dodd-Frank Act.
Although Dodd-Frank legislation increased the amount of funding Congress was to appropriate annually to the SEC, funding is at the whim of Congress, and in recent years, up to hundreds of millions of dollars have been withheld annually by Congress in its annual appropriation to the SEC, hamstringing the agency.
It should be noted that if the SEC used all the revenue it brings in annually through fees, this would not add to the U.S. deficit or budget because this is money that comes to the SEC from firms in the investment or financial services industry—not from taxpayers. Walter is eloquent about this issue in her dissent regarding the SRO Study. For more, see this article: "In Unusual Move, SEC Commissioner Elisse Walter Dissents on SRO Study."
I would like to hear what you think about the three options that the SEC's SRO Study recommended to Congress. If you will copy and paste your favorite option (or write in your own) into an e-mail to me at [email protected], I'll report what you tell me on these pages. Here are the SEC's options for RIA oversight:
"(1) Authorize the Commission to impose user fees on SEC-registered investment advisers to fund their examinations by OCIE;
