Page 33 - Investment Advisor April/May 2023
P. 33

THE PLAYING FIELD

                                                           By Melanie Waddell




                 RIA Growth Continues to Outpace SEC

                 Exam Resources


                 As with the Dodd-Frank Act, Congress will have to take action to help

                 increase exam frequency of investment advisors, says Michael Canning
                 of the LXR Group.



                                                         he Securities and Exchange   principal place of business or have more
                                                         Commission’s ability to oversee   than a de minimis number of clients,”
                                                   Tthe growing number of regis-     Roye said.
                                                   tered investment advisors has come to   “There were over 35,000 investment
                                                   the fore once again.              advisors in the United States” as of 2021,
                                                     The topic was debated at a recent   with almost 375,000 investor advisor rep-
                                                   meeting of the SEC’s Investor Advisory   resentatives, he continued. “Investment
                                                   Committee, with industry and SEC offi-  advisory firms manage almost $129 tril-
                                                   cials grappling with how to handle this   lion, and serve over 65 million clients.”
                                                   ongoing challenge for the agency. While   Since 2016, Roye said, “the number of
                                                   some officials believe more funding will   SEC-registered advisors has increased
                                                   do the trick, others see Congress having   25% to over 15,000, and this is a growth
                                                   to step in — once again — to try and rem-  rate that far outpaces SEC’s staff increas-
                                                   edy the problem.                  es. Over the same period, the SEC exam
                                                     Paul Roye, former senior vice   staff has increased only 4%.”
                       [“Since 2016,] the          president of Capital Research and   In 2021 alone, “900 new advisors reg-
                         number of SEC-            Management Co., and a former head   istered with the SEC,” he explained.
                                                   of the SEC’s Division of Investment
                                                                                     “The largest increase in SEC-registered
                     registered advisors           Management, explained at the meet-  entities has occurred in the investment
                                                   ing that, unlike broker-dealers, there’s
                                                                                     advisory industry.”
                   has increased 25% to            no self-regulatory organization to assist   Roye added this growth “is due, at
                   over 15,000, and this           the SEC in overseeing the investment   least in part, to many in the broker-deal-
                                                                                     er industry migrating to the investment
                                                   advisory industry. Thus, the SEC and the
                    is a growth rate that          states “are the only entities conducting   advisor industry.” Since 2012, the num-
                      far outpaces SEC’s           exams of investment advisors.”    ber of broker-dealer firms has declined
                                                     In 2022, Roye said, the SEC exam-
                                                                                     18%, he said.
                   staff increases. Over           ined  15% of  RIAs.  The  RIA exam  rate   “does not fully capture the increasing
                                                                                       The growth in the number of RIAs
                                                   has remained mostly stable since 2019,
                    the same period, the           according  to SEC  reports. In  contrast,   complexity of the investment manage-
                     SEC exam staff has            the SEC and the Financial Industry   ment industry, whose firms are developing
                                                   Regulatory Authority “together exam-
                                                                                     more sophisticated trading and investing
                     increased only 4%.”           ined nearly half  of registered broker-  strategies, and this results in increasing
                                                   dealers,” Roye, a member of the Investor
                                                                                     complexity of the compliance issues and
                                 —Paul Roye        Advisory Committee, said.         risks covered by examinations,” he stated.
                                                     Under the Dodd-Frank Act, advisors   In his remarks at the Investor Advisory
                                                   with at least $100 million in assets under   Committee meeting, SEC Commissioner
                                                   management must register with the   Jaime Lizarraga, a Democrat, noted that
                                                   SEC. Advisors with fewer assets must   investment advisors “provided asset
                                                   register in the states “where they have a   management services  to  47.3 million



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