Among other criticism lodged against the SEC was its inability to conduct routine examinations of investments advisors beyond a small sampling in any given year. Dodd-Frank required an analysis of whether investments advisors should have their own self-regulatory organization to conduct some examinations because the SEC lacked the resources to comprehensively examine them. Three options are being considered; (1) provide additional funding to the SEC; (2) give the responsibility to FINRA; or (3) create a new SRO.
A recent study by the Boston Consulting Group has found that it would cost investment advisors twice as much money to pay an SRO than it would to properly fund the SEC. In a related study, BCG found that the overwhelming majority of investment advisors surveyed preferred to have continued SEC oversight than have FINRA act as their SRO regardless if it cost more to properly fund the SEC. Investment advisors even preferred the creation of a new SRO over giving oversight responsibility to FINRA.
The key take away from this study is economics. In this age where the public is clamoring for more oversight, the least expensive avenue to pursue that oversight is to have the SEC funded in a manner that would allow it to conduct more meaningful examinations across a greater sector of investment advisors. Plus, this course avoids the unnecessary overlap, bureaucracy and increased costs if FINRA’s jurisdiction is expanded to include investment advisors. Where money talks, investment advisors should expect that the SEC will maintain oversight over you. But do not expect the status quo; you should expect increased funding and a dramatic increase in examinations over a greater segment of investment advisors. In the end, the devil you know is better than the devil you do not know.