A Securities and Exchange Commission committee today approved recommendations that call for user fees for investment advisors to fund examinations and new rules for brokers who provide advice.
The Investor Advisory Committee agreed that the SEC should support legislation by Congress that would allow the agency to charge fees to investment advisors that would specifically be used to fund examinations.
Committee member Craig Goettsch, director of Investor Education and Consumer Outreach for the Iowa Insurance Division, said the group looked at three possibilities and the user-fee option was the least costly. The other two options would be for the Financial Industry Regulatory Authority (Finra) to regulate registered investment advisors or for a new self-regulatory organization to be created to oversee RIAs.
He said a study by the Boston Consulting Group showed that annually a user-fee program would cost between $100 million and $270 million, Finra oversight would cost between $550 million and $610 million, and a new SRO would cost between $610 million and $670 million.
Goettsch added that the CFP Board of Standards, the National Association of Personal Financial Planners (Napfa) and other advisory groups support the user-fee option over the others.
For years, Congress has not appropriated enough money for the SEC, so it doesn't have the funds to do an adequate number of examinations of RIAs, committee members agreed. Many advisors have never been examined by the SEC, they noted.
"We have a pressing problem that investment advisors are not beeing adequately overseen. It's going to explode in our faces at some point," said committee member Barbara Roper, director of investor protection for the Consumer Federation of America. User fees to pay for exams is the best alternative, given the circumstances, to address this problem, she added.
The committee's ballpark goal would be for user fees to generate enough funds so that one-quarter of advisors could be examined every year, Rpoer said. Some advisors could be examined less frequently, and "high-risk" advisors could be examined more often, she said. The committee also would like the fees to be lower for smaller advisors.
The committee also approved a two-part recommendation regarding broker-dealer fiduciary rules. One part calls for brokers to provide customers with a pre-engagement disclosure document, similar to RIAs’ ADV forms, that would describe what services they provide and how they are compensated.
The other part of the recommendation – which is far more controversial in the broker-dealer community – calls for new rules for brokers who provide advice to retail customers.
Roper said the new rules would allow customers to tell the difference between “advisors” and “brokers.” Standards for anyone calling themselves an “advisor”—whether he was an SEC-registered RIA or subject to Finra regulation—would be harmonized so all “advisors” would be fiduciaries and acting in the best interest of clients. A person who was doing purely transactional business and providing “solely incidental” advice could still call himself a broker, she said, but the new rules should define what “solely incidental” means.
“If you want to call yourself an advisor and market yourself as an advisor, you would be subject to the same rules as anyone else,” she said.
The recommendations were made to the committee by its Investor as Purchaser Subcommittee.