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News December 19, 2011 Issue

Report Says Adviser SRO Costs Would Be Significantly Higher Than Enhanced SEC Oversight

On December 15, the Boston Consulting Group (BCG) released a report finding that an SRO oversight regime would cost advisers double what they would pay in user fees to support an enhanced existing SEC oversight program.

The report was commissioned by an industry group comprised of the Investment Adviser Association (IAA), Certified Financial Planner Board of Standards (CFPBS), National Association of Personal Financial Advisers (NAPFA), Financial Planning Association (FPA), and TD Ameritrade Institutional (TDAI). In the report, BCG analyzed the costs of the three options outlined in the SEC’s Dodd-Frank Act Section 914 report on the enhanced oversight of advisers. The report based cost findings on an assumption that advisers would be examined on average once every four years.

The bottom line?

BCG’s independent analysis projected that the average fee per advisory firm would be $27,300 a year for a full "enhanced" SEC examination program, $51,700 a year for an SRO operated by FINRA, and $57,400 a year for a newly formed adviser SRO.

FINRA, which has been lobbying to become an adviser SRO, immediately took issue with the findings. In a statement, FINRA challenged the data on which the report was based, calling its cost projections "wildly inflated" and the methodology "flawed" and unclear. FINRA said BCG never met with FINRA or the SEC to explore costs, and never asked for a meeting.

BCG partner Gary Shub responded that BCG expected future discussions with both FINRA and the SEC regarding the results of the report, and that there is ample public data to support the findings. "We are very confident in the report’s analysis and findings," he said.

There are two key takeaways from the report, said Shub. First, the SRO options are significantly more costly approaches than enhanced SEC oversight. Second, BCG found that advisory firms "overwhelmingly" preferred continuing SEC oversight to oversight by any SRO – even if SEC fees would become materially higher than SRO fees.

More than 80 percent of advisers said they preferred the SEC over a FINRA-IA SRO in the context of a user fee that would be about 24 percent lower than a FINRA membership fee. However, even if the cost of continued SEC oversight was twice the cost of a FINRA IA SRO, 58 percent of the 424 advisers surveyed indicated that they would still prefer SEC oversight. More than 60 percent of dual registrants said they would prefer the SEC to a FINRA IA SRO. BCG said the adviser group surveyed was broad based, and the survey results "are statistically significant at a 95 percent confidence level, +/- four percent."

In a joint press conference this afternoon, representatives from the industry group highlighted the intangible costs of an SRO approach as well.

CFPBS CEO Kevin Keller called any SRO "an unnecessary new bureaucracy" and said that the BCG study "presents a compelling economic case to keep oversight of investment advisers at the SEC."

NAPFA chair Susan John said FINRA’s lack of experience overseeing advisers and its "rules-based regime" prevent it from being well-positioned to be an adviser SRO.

IAA executive director David Tittsworth noted that FINRA’s lack of accountability, lack of a track record, and lack of any adviser oversight experience, as well as its being outside Congressional oversight all underscore that outsourcing to FINRA is "not the way to go."

"We think the way forward is clear," said TDIA managing director for advisor advocacy and industry affairs Skip Schweiss. "Keep oversight with the SEC."