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From Securities Regulation Daily, April 19, 2013

House Legislation Would Authorize SEC to Collect Fees from Investment Advisers to Defray Cost of Oversight

By Jim Hamilton, J.D., LL.M

Legislation authorizing the SEC to impose and collect user fees on investment advisers has been introduced by Rep. Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee. The Investment Adviser Examination Improvement Act, H.R. 1627, is designed to provide the SEC with a dedicated funding source in order to enable more robust investment adviser oversight. The legislation is very similar to legislation Rep. Waters introduced in the 112th Congress.

The bill would direct the SEC to collect an annual fee from registered investment advisers to defray the cost of SEC inspections and examinations. H.R. 1627 also declares the sense of Congress that the SEC should increase the number and frequency of examinations of investment advisers.

The legislation prescribes a fee calculation formula and requires the SEC to make the formula publicly available on its website along with the factors used to reach the fee determination.

Investment Adviser Fee. The legislation specifically directs the SEC to consider the following factors in calculating the fee to be assessed against investment advisers: 1) the anticipated cost of conducting inspections and examinations of investment advisers; 2) the adviser’s size, including assets under management; 3) the number and type of the adviser’s clients and the extent to which they pay SEC registration and transaction fees; and 4) other objective factors, such as risk characteristics, that the SEC deems appropriate.

Report. The Comptroller General would have to audit biennially the use of such fees, SEC reviews of the fee formula, and any adjustments to it; and report to Congress.

State-Regulated Advisers. The legislation would exempt state-regulated investment advisers from the requirement to pay an annual fee. State securities regulators and investment adviser industry groups support the legislation. Heath Abshure, president of the North American Securities Administrators Association, and Arkansas Securities Commissioner, said that state securities regulators strongly support Congressional efforts to improve the oversight of SEC-registered investment advisers by acting on a recommendation of the Dodd-Frank Act and establishing a dedicated funding mechanism to ensure that SEC resources are aligned with the agency’s examination responsibilities.

The Investment Advisor Association noted that the legislation will provide a stable source of funding to the SEC to be used for the sole purpose of enhancing investment adviser examinations and will do so without the expenditure of any additional taxpayer dollars.

The Waters legislation is part of Congressional efforts to address a situation in which the SEC currently examines approximately eight percent of investment advisers annually out of approximately 11,000 advisers registered with the Commission.

SEC Study. The proposed legislation is consistent with a recommendation in an SEC staff study required under Section 914 of the Dodd-Frank Act, which directed the SEC to assess the need for enhanced examination of investment advisers and report its findings to Congress. In the mandated study, the SEC presented Congress with three options: 1) authorize the SEC to impose user fees on SEC-registered investment advisers to fund their examinations by the SEC’s Office of Compliance Inspections and Examinations; 2) authorize one or more SROs to examine, subject to SEC oversight, all SEC-registered investment advisers; or 3) authorize FINRA to examine dual registrants for compliance with the Investment Advisers Act.

Rep. Waters believes that the approach taken by the legislation, in codifying option 1 of the SEC study, provides the simplest and most efficient solution to the problem of inadequate oversight of investment advisers.

SRO for Advisers. Other voices have espoused option 2 in the SEC staff study, a SRO for SEC-registered investment advisers. In the view of House Financial Services Committee Chairman Emeritus Spencer Bachus (R-ALA), of the three alternative approaches recommended in the SEC study, a SRO for investment advisers is the most comprehensive and streamlined approach to addressing the regulatory weakness.

To that end, in the 112th Congress, then Chairman Bachus introduced the Investment Advisers Oversight Act, H.R. 4624, to establish a SRO for investment advisers. Noting that SEC-registered investment advisers are generally inspected once every decade, Chairman Bachus said that investor protection requires more timely oversight of investment advisers. He noted that H.R. 4624 closes a glaring regulatory gap that undermines investor confidence. One of the tenors of the Dodd-Frank Act is that the inadequate oversight of investment advisers is a weakness of the current financial regulatory system, he emphasized.

MainStory: TopStory InvestmentAdvisers

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