SEC Official Pitches User Fees for Adviser Exams

The idea of regulators imposing user fees to bolster their budgets is an idea that rarely gains traction in Congress – for several years, for example, the Obama Administration has unsuccessfully advocated their use by the Commodity Futures Trading Commission. The latest pitch comes from the Securities and Exchange Commission as a means to better fund advisor exams.

During a speech last week before the 38th Annual Southwest Securities Conference in Dallas, Rick Fleming, the SEC’s investor advocate, urged Congress to consider user fees for registered investment advisors, citing the agency’s low rate of examinations. Fleming pointed out that the Commission examined only 9 percent of registered investment advisers in Fiscal Year 2013, which equates to a frequency of approximately once every 11 years, “a rate that many observers find unacceptable.”

The Office of the Investor Advocate is a relatively new office. In February, Chairman Mary Jo White appointed Fleming as the first Investor Advocate. The role of the office is to ensure that concerns of investors are considered as policies are adopted by the Commission and self-regulatory organizations.

“There are multiple reasons for the lack of exam coverage, but in my view it primarily boils down to the fact that the SEC has not received sufficient resources to keep up with the burgeoning workload,” Fleming said. The number of SEC-registered advisers has grown by approximately 40 percent over the past decade to nearly 11,500.  The amount of assets managed by investment advisers climbed from $20 trillion a decade ago to an estimated $55 trillion by the end of Fiscal Year 2015. By comparison, staff in the SEC’s Office of Compliance Inspections and Examinations has grown only about 10 percent in the past decade.

A solution, Fleming said, is for Congress to authorize the SEC to collect an annual user fee from registered investment advisers and to limit the use of those funds to expenses associated with investment adviser examinations. “Admittedly, a shorter examination cycle won’t stop all fraud, but I believe it will allow the SEC to halt these types of activities sooner and will provide a stronger deterrent to advisers who might otherwise succumb to the temptation to steal,” he said. “It will also curtail other unethical practices, including excessive fees, excessive trading, and undisclosed conflicts of interest.”

While the idea of a user fee “sounds a lot like a tax,” Fleming claimed that several industry associations that represent investment advisers have endorsed the concept and support an increased regulatory presence.

What of critics who object to the fee because the SEC’s budget has increased substantially in the wake of the financial crisis? OCIE spending, for example, increased from $208 million in Fiscal Year 2009 to $271 million in 2013. Fleming said numbers can be deceiving because “the growth in the OCIE budget has been dwarfed by the growth in the number and complexity of registrants, leaving OCIE unable to improve its overall examination coverage rate.”

Fleming argued against suggestions that increasing third party audits could be an alternative to user fees, calling them “more expensive for the industry and less effective for investors.”

“I worry that it will be impossible to reverse course if the Commission starts down that road,” he said. “But if the Commission isn't given the resources to do the job adequately, and given them soon, it may be left with few options.”