Expanded SEC Examination Program for Advisers


In light of the more than 11,000 investment adviser firms registered with the SEC at the end of 2015, there is a concern that the SEC’s examinations of these advisers fail to adequately monitor activity at firms and protect investors.

As a result, the Dodd-Frank Act called upon the SEC to study how to improve oversight of RIAs and to report back to Congress within a year. The SEC's staff recommended that oversight be retained by the SEC, but that funding be increased to pay for the agency’s expanded examination and enforcement, either through appropriations or through the retention of examination fees.

Since Dodd-Frank was passed in July 2010, various bills and reports have recommended solutions to the problem of inadequate examination frequency of RIAs by the SEC, including the formation of a separate oversight body to examine advisers, housing an adviser examination program within the FINRA, and funding an augmented SEC-examination program through fees assessed on the firms being examined.

A number of factors will constrain the final structure of RIA oversight. First among these is opposition by RIAs to FINRA oversight. Second, the SEC is unlikely to see its budget increase significantly or sufficiently to fund additional exams until or unless economic growth reduces fiscal deficits to a more manageable level. Third, Congress is unlikely to grant the SEC authority to collect and retain examination fees from RIAs. It is also highly unlikely that the SEC will receive self-funding authority in the near future, nor is it likely that FINRA will oversee RIAs.

CFA Institute Viewpoint

Investment adviser oversight requires experience in, and an understanding of, the Investment Advisers Act of 1940 and the practical application of its fiduciary-duty requirements, the investment advisory business, and operation of the financial markets.

Given this requirement, CFA Institute believes the SEC is the best entity to conduct these examinations. It needs sufficient resources to do this, however, through congressional funding that would allow it to meet its regulatory mandates. A November 2010 CFA Institute member survey supports this view, particularly in the examination and enforcement areas.

CFA Institute does not support FINRA’s oversight of advisers for two reasons. First, FINRA lacks the expertise of SEC staff in the rules and regulations of the Investment Advisers Act. Second, FINRA uses a rules-based system of oversight, which we believe is not appropriate for this segment of the investment industry.


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