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News July 30, 2012 Issue

Waters Introduces User Fees Bill for Adviser Exams

Until now, all advisers could do was fight FINRA’s efforts to push an adviser SRO through Congress.

Suddenly, the field has opened for meaningful debate. Far and away the first choice of the adviser industry – user fees to fund an expanded SEC adviser examination program – has finally gotten its launch in Congress.

Representative Maxine Waters (D-CA) introduced the Investment Adviser Examination Improvement Act of 2012 on July 25. The bill would authorize the SEC to assess user fees to fund an expanded SEC adviser examination program. The fees would vary by size and nature of the adviser, and the funds would be available only for augmenting the adviser examination program.

"I believe that this approach provides the simplest, most efficient solution to the problem of inadequate investment adviser oversight," said Waters in a statement released at the bill’s introduction. Waters also said she believes the user fee option will be more cost effective for the industry than the whole-cloth establishment of one or more self-regulatory organizations.

The Investment Adviser Association (IAA) and the Financial Planning Coalition (FPC) support the proposed legislation wholeheartedly. "This legislation represents the smartest, fastest, and most cost-effective solution to ensure greater frequency of investment adviser examinations," said IAA executive director David Tittsworth.

The FPC called the bill a "credible alternative" to the adviser SRO bill introduced by Representative Spencer Bachus (R-AL) back in April. "[C]reating a new SRO is not the right solution," said the FPC. "The burden of excessive regulation and cost would fall unfairly on small business owners while many larger firms would be exempt and would go unaffected."

In support of the bill, both the IAA and FPC noted that user fees will not impact the federal budget or cause taxpayers to bear any additional burden. The organizations also noted that the legislation keeps oversight with the SEC, which – unlike an SRO – is accountable to Congress and the public.

The user fees would be assessed annually, and be devoted solely to SEC-registered adviser examinations.

What’s inside the bill.

The bill provides that the user fees will fund "additional inspections and examinations" above and beyond current exam operations, specifically the number of exams conducted in the SEC’s 2011 fiscal year. The SEC must continue to provide regular funding for the base examination program from its budget.

The fee formula, to be established by SEC rulemaking, will take into account the following factors:

  • The cost to conduct the additional exams, considering how many will be needed and how often they will occur;
  • The size of the adviser, including it assets under management except for mutual fund assets;
  • The number and type of clients an adviser has; and
  • Other factors the SEC views as important, such as risk characteristics, for example.

After the SEC determines a fee formula, it would post the formula on its web site along with the factors used to determine the formula. Each year the SEC must review the adequacy of the formula, and post any proposed adjustments for public notice and comment.

Every two years, the fee assessments would be audited, including the calculation of the formula and any adjustments to the formula.

Funds generated from these user fees would be solely available to augment adviser examinations by the SEC, but the funds are not "use or lose." Excess funds in any given year would be available for use in any subsequent fiscal year.

The legislation provides for accountability, transparency, and reporting to demonstrate and measure improvements to the SEC’s examination program, said Tittsworth. The legislation also leaves the job – far and away – in the most experienced hands and on the most cost-effective basis, he said.

What happens next?

Although the bill is now out there, and provides an alternative to the SRO solution, it is unclear what the future holds for either bill. The current Congressional session is rapidly coming to a close, driven even faster by the election year.

It is unlikely that either bill will make it out of committee in 2012.

Bachus tabled consideration of his bill indefinitely on the same day the Waters bill was introduced.