Boston Consulting Group (BCG) released a report last month comparing the cost of the various possible options of different agencies examining investment advisers. This report was conducted as a follow-up to a study released by the Securities and Exchange Commission (SEC) in January 2011, which created these scenarios based on Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The three possible options would be:
- Authorizing the SEC to conduct the examinations and fund them by collecting user fees;
- Authorize a new self-regulatory organization (SRO) to examine the advisers; or
- Authorize the Financial Industry Regulatory Authority (FINRA) to examine the advisers
The economic analysis of the options was based on public research along with more than 40 in-depth interviews with various investment advisory firms. The SEC and FINRA were not interviewed or consulted in this analysis. The report concluded that the creation of enhanced SEC capabilities would cost $240-$270 million, while setting FINRA up as the investment adviser SRO would cost $550-$610 million, and creating a new SRO would cost $610-$670 million. These estimates were developed by projecting setup costs, ongoing mandate costs, and the cost associated with SEC oversight of an SRO.
FINRA immediately rejected these findings, claiming the cost of FINRA oversight was “wildly inflated.” It alleges this because the report’s numbers do not take into account registration fees specific to brokers, nor does it consider the ease of implementation. Richard Ketchum, chairman and chief executive officer of FINRA, stated, “Given our experience operating a nationwide program for examinations and our ability to leverage existing technology and staff resources to support a similar program for investment advisers, we believe we are uniquely positioned to serve as at least part of the solution to this pressing problem.” FINRA also complained that BCG did not contact them for input before publishing their findings. In addition, FINRA objected to the fact that BCG did not survey investors, reasoning that their input would be important since the regulation’s purpose is to protect them. FINRA contends that its own analysis shows the projected cost has been inflated; however, it has not released details of that analysis.
BCG maintains that its findings are accurate even in the face of these complaints. Gary Shub, a partner at BCG said he believes “there is ample publicly available data and research to inform a rigorous economic analysis of the options.”
In addition to performing an economic analysis of the various options, BCG also surveyed investment advisers to determine which option they preferred. The responses show that advisers are generally uneasy about the prospect of FINRA oversight. More than 80% of all of the 424 advisers surveyed preferred to be regulated by the SEC instead of FINRA. When asked if their opinion would change if the cost of SEC regulation was three times as much as under FINRA, 46% still preferred to be regulated by the SEC. Furthermore, when asked if they would prefer to be regulated by FINRA or a new SRO, 75% expressed a preference for a new SRO.
Investment advisers already subject to FINRA oversight because of a broker-dealer affiliation were less averse to having FINRA as their primary examiner, although half of them were still opposed to the idea.
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