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Bill Signals Congressional Aim to Step Up Advisor Scrutiny

A bill authorizing the Securities and Exchange Commission (SEC) to increase the number and frequency of exams administered to investment advisors, and to charge advisors a fee to take the tests, received an important endorsement recently but appears to lack support from one key constituency: House Republicans.

Rep-John-Delaney-D-MdIntroduced in April, the Investment Adviser Examination Improvement Act of 2013 (H.R. 1627), is sponsored by Rep. Maxine Waters, D-Calif., and Rep. John Delaney, D-Md. Five other Democrats have joined as cosponsors.

Will the bill die in a legislative committee, beaten back by industry advocates and lawmakers fed up with fees levied on their industry? In 1992 and 1993, the House approved similar fee legislation.

Supporters say it is crucial to protecting investors, since the SEC doesn’t have the funds to pay for more examiners to police the 11,000 federally registered investment advisors it oversees. Together, those advisors manage as much as $48 trillion in assets.

For all the wealth these advisors control, the typical registered investment advisor (RIA) can expect to be examined only once every 12 to 13 years. The SEC’s annual examination rate of 8 to 10 percent of RIAs a year is not enough, the bill’s proponents say. As many as 40 percent of investment advisors have never been examined.

In a 2011 study, the SEC itself noted the importance of administering more investment examinations, and both former SEC Chairwoman Mary Shapiro and current Chairwoman May Jo White have called for more advisor examinations as a way to protect investors. In November, the SEC’s Investor Advisory Committee recommended a user fee.

With the growth in the financial services industry paralleling the growth of self-directed retirement in the past 30 years, the number of investment advisors has also increased. SEC examination capabilities simply haven’t kept up.

The advisor exam fee bill got a major boost early in December when a powerful coalition of consumer and financial advisor groups also urged Congress to support it.

Rep-Maxine-Waters-D-CalifIn a letter from the Certified Financial Planner (CFP) Board of Standards to Congress, representatives of financial advisor and consumer protection organizations warned that the inability to administer more frequent exams could lead to more incidents of fraud and abuse, which cost investors hundreds of millions of dollars every year.

“We are deeply concerned that the SEC’s current inability to examine investment advisors more frequently increases opportunities for investor fraud and abuse,” the coalition said in the letter circulated in early December. In addition to the CFP Board, the Financial Planning Association, the Investment Adviser Association, the National Association
of Personal Financial Advisors, the North American Securities Administrators Association, the Consumer Federation of America and the AARP have come out in support of the bill.

With more investment advisors in the marketplace, SEC regulatory actions against “bad apple” advisors have increased as well. The SEC took action against 140 advisors or advisor companies in the 2013 fiscal year, nearly double the 76 actions taken in 2009, according to SEC data.

In the five-year period ending in 2012, investor complaints received by the Financial Industry Regulatory Authority (FINRA) dropped to 2,785 from 5,405 in 2008. The number of new disciplinary actions filed rose to 1,541 in 2012 from 1,073 in 2008.

There were 294 individuals barred in 2012, down from 363 in 2008, but the 549 individuals suspended last year was far higher than the 321 suspended in 2008, FINRA statistics also show.

The coalition urging support for the bill cites a 2011 study by the Boston Consulting Group which found broad support among advisors for a user fee as “the least expensive of the options set forth” in the SEC study.

Approximately 81 percent of investment advisors said they preferred SEC oversight rather than FINRA, the BCG survey found.

The Investor Adviser Examination Improvement Act would cover the cost of administering exams and inspections. Extra funds would not be considered public funds available for general purposes.

The calculation formula would vary ,depending on exam frequency, assets under management, and the number and type of client managed by the advisor. The Comptroller General of the United States would conduct an audit of the fees every two years.

In other news on the scrutiny front, the SEC and FINRA have said they will be taking a closer look at advice given when workers roll over their assets from a workplace 401(k) to an individual retirement account. Both agencies said they are looking at agencies practices because, with $5.6 trillion in employer-sponsored plans, they are concerned about abuse as people retire.

FINRA said brokers should be thinking through several options with the investors, including low-cost funds. They should also be discussing differences in fees. FINRA said a plan participant leaving an employer typically has four options for a 401(k): leave the money in the former employer’s plan, if permitted; roll over the assets to the new employer’s plan, if one is available; roll over to an IRA; or cash out the account value. The participant can also combine the options.

FINRA focused on retirement funds as its first priority for 2014, issuing a notice reminding agencies of several regulations that included suitability, conflicts of interest and adequate registered representative training.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]


Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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