While I agree with much of what MarketCounsel founder and managing director Brian Hamburger has to say in his article “Sleight of Hand,” published in your October 2012 issue, I feel compelled to set the record straight on his description of the “Investment Adviser Examination Improvement Act of 2012,” introduced by U.S. Rep. Maxine Waters (D., Calif.), that would authorize the SEC to impose user fees for examinations of SEC-registered advisory firms.

As a preliminary matter, I note that House Financial Services Committee Chairman Spencer Bachus’s advisor SRO bill was not “passed over” for Rep. Waters’ proposal. In fact, in response to a press inquiry about his position on Rep. Waters’ bill, Chairman Bachus stated on July 25 that neither his advisor SRO bill nor Rep. Waters’ user fee proposal would move forward in his committee. 

Further, Mr. Hamburger’s assertion that the Dodd-Frank act resulted in about 4,000 advisors (about 35% of all 2011 registrants) shifting from federal to state jurisdiction as a result of the new $100 million threshold for SEC-registration vastly overstates the effects of Dodd-Frank. As documented in the 2012 Investment Adviser Association and National Regulatory Services’ Evolution/Revolution report on the investment advisory profession, the actual number was closer to 2,400. Moreover, because the Dodd-Frank act required certain private fund advisors to register as investment advisors, this 2,400 decrease in registrations was offset by more than 1,500 newly registered firms. The bottom line is that the Dodd-Frank act resulted in a 9% decline in the total number of SEC-registered investment advisors, from 11,539 in 2011 to 10,511 in 2012. 

Finally, Mr. Hamburger asserts that as it’s currently written, the Waters proposal “actually encourages the SEC to be as inefficient as possible in conducting advisor examinations” and that, “The agency would generate more revenue for itself if it conducted lengthy, onerous and inefficient examinations that took weeks or months, rather than giving advisors expeditious and focused examinations … .”

In fact, the Waters bill very clearly specifies that user fees may be used only to defray the costs of inspections and examinations in a given fiscal year that are in excess of the number of inspections conducted by the SEC in 2011, creating a clear incentive for the SEC to streamline its examination process and use its resources more efficiently. In this regard, it is also worth noting that the bill includes explicit transparency, review and accountability provisions that will allow increased oversight of the SEC’s examination program.

Although the current Congress is—thankfully—coming to an end, it is important to focus on the facts, inasmuch as Finra’s effort to gain authority over advisors is likely to be renewed in 2013 and it is incumbent upon the advisory community to think thoughtfully about alternative means of enhancing the SEC’s examination program.

Neil A. Simon
Vice President for Government Relations
Investment Adviser Association