Ordinarily, independent advisors would not pay much attention to news that the Securities and Exchange Commission appointed Kenneth A. Johnson as its new chief financial officer last Friday.
But Johnson takes over the SEC’s financial operations just as the regulator prepares to amass a bigger operating budget, while focusing on a smaller pool of advisors, putting more of the industry in the hot seat.
“Those two forces imply that the SEC will be on the lookout,” said Tim Welsh, president of Nexus Strategy, a marketing consulting firm based in Larkspur, Calif. He added that advisors should be asking themselves questions like: “Do I have a document management system?”
Right now, the SEC stands to significantly increase its operating budget for fiscal year 2011 from three sources. The House version of financial reform legislation, which is now being reconciled with the Senate version passed last Thursday, includes a provision to require the SEC to collect user fees from independent advisors to pay for a compliance inspection and examination program. The proposal does not set the fee amount, but the SEC has wide latitude to set that fee.
“A lot of people have either ignored or forgotten about that,” said David Tittsworth, executive director of the Investment Adviser Association.
Also, in April the regulator asked the Senate Appropriations Committee to raise its apportionment to $1.3 billion, a 12% increase over the amount for fiscal year 2010. Appearing before the committee last April, SEC Chairman Mary Schapiro said the funds would allow the SEC to hire 374 more professionals, a 10% increase over the previous fiscal year, and which would bring the total number of professionals to 4,200. The money would also allow the agency to continue expanding its investments in staff training, as well as technology for surveillance, risk analysis and other purposes, according to press reports.
For fiscal year 2010, the Senate Appropriations Committee enacted a $230 million apportionment to the SEC for all of its inspections and examinations, according to an agency spokesman. The regulator requested $256 million for fiscal year 2011.
And under a self-funding mechanism proposed by the Senate, the SEC will likely get to control the estimated $1.5 billion in fees that it charges public companies and other entities to register their securities (Currently, those fees go to the U.S. Treasury). The regulator also announced, on April 30, that it is raising those fees to $116.10 per million, from $71.30 per million. “Under almost any outcome, the SEC is going to have significantly more resources, there is no doubt about that,” Tittsworth said.
Both houses of Congress are planning to require that firms with $100 million or more in assets under management register with the SEC, up from the current $25 million threshold. That would effectively shift oversight of 4,000 federally registered investment advisory firms to the states. So with far more resources, and a smaller group of advisors to monitor, the SEC is likely to put heavy emphasis on inspection and examinations.
True enough, Johnson has had very policy-neutral responsibilities since he joined the SEC in 2003. He was a management analyst in the office of the executive director, where he advised on all aspects of the budget process, the agency said in a statement. But he has taken on more influential roles in the agency, like serving as a staff expert on legislative proposals. More recently, he managed the development of the regulator’s long-range Strategic Plan, which will guide its policy through 2015.
Industry sources see his appointment as a step closer to realizing the SEC’s stated objectives for the profession. “There is going to be increased focus on investment advisors,” Tittsworth said. “The bottom line is they should be aware of the increased scrutiny.”