Asset Managers Report Significant Increases To Comply With New SEC Regulations For Investment Advisers Act

Charlottesville, VA/Washington, DC, November 8 — Asset managers have significantly expanded, sometimes doubling, their staffs and are investing more money in compliance efforts to meet new regulatory obligations by the Securities and Exchange Commission under the Investment Advisers Act, according to a survey (PDF) by CFA Institute and the Investment Adviser Association.

“Our survey shows that advisory firms are committing additional resources to comply with the new regulations,” said Karen Barr, IAA General Counsel. “For many firms, this means a doubling of staff and expenditures during the past year.”

“Asset managers must develop programs that detect and prevent violations of the Investment Advisers Act,” said Jeff Diermeier, CFA, president and CEO, CFA Institute. “It’s clear from the survey that significant resources must be devoted in order to develop an effective compliance program.”

Firms were asked how many employees were assigned, in whole or in part, to compliance functions in 2004 and 2005. The average number of these firm employees rose from one to “two to four.” The percentage of survey participants who had two to four employees performing compliance functions grew from 31 percent in 2004 to 43 percent in 2005. Similarly, the number of firms with more than one employee assigned to compliance functions increased by 31 percent from 2004 to 2005. The survey also found that more firms are employing personnel who are solely devoted to compliance functions.

Total compliance costs more than doubled between 2004 and 2005. The average expenditure in 2004 was $144,394; in 2005, $221,900, a 54-percent increase. The average anticipated compliance costs for 2006 are $247,776, an increase of more than 11 percent from 2005. When asked to estimate the total number of staff hours spent on compliance-related projects and functions in 2004, the average response was 501-1000 hours. In 2005, the average estimate doubled to 1001 to 2000 hours.

The survey garnered responses from 183 asset managers, 41 percent of whom manage between $100 million and $1 billion, and another 23 percent manage between $1 billion and $5 billion. Forty-six percent of the respondents have 10 people or fewer in their firms.

The Investment Advisers Act requires the registration of certain investment advisers with the SEC. An investment adviser is generally someone who, for compensation, advises others about the advisability of investing in, purchasing, or selling securities. In 1996, Congress amended the Advisers Act to provide that only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the SEC. (States generally regulate other investment advisers.) The law covers matters such as: record-keeping; substantive content of advisory contracts; advertising; custody of client funds and assets; and proxy voting. It also imposes antifraud provisions. Last year, the SEC approved a rule requiring most hedge fund managers to register under the Investment Advisers Act. The new rule goes into effect on February 1, 2006.

CFA Institute and IAA are releasing the survey prior to the Hedge Fund Advisers Compliance conference that they are holding in Washington, D.C. on Wednesday and Thursday, November 9 – 10, to help hedge fund advisers meet impending regulatory and compliance obligations imposed by the Securities and Exchange Commission. The two-day conference includes 14 panel discussions involving senior SEC staff. (Information is available at: http://www.icaa.org/public/hedgefundconference_2005.pdf.)

About CFA Institute
CFA Institute is the global, non-profit professional association that administers the Chartered Financial Analyst® (CFA®) curriculum and examination program worldwide, publishes research, conducts professional-development programs, and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has nearly 80,000 members in 124 countries and territories, including the world’s 67,000 CFA charterholders, as well as 131 affiliated professional societies in 52 countries and territories. CFA Institute is headquartered in Charlottesville, Va., USA, with regional headquarters in London, Hong Kong, and New York. More information may be found at www.cfainstitute.org. (Bloomberg users can find CFA Institute at 497458Z).

About the Investment Adviser Association
The Investment Adviser Association is a not-for-profit organization that exclusively represents the interests of federally registered investment adviser firms. Based in Washington, DC, the IAA provides a wide range of advocacy, informational, and educational services to its membership. The Association was founded in 1937 as the Investment Counsel Association of America and played a major role in the enactment of the Investment Advisers Act of 1940, the federal law regulating the investment adviser industry. Today, the IAA consists of more than 400 investment adviser firms that collectively manage in excess of $5 trillion in assets for a wide variety of institutional and individual clients. More information may be found at www.investmentadviser.org.