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Underfunding SEC Puts Investors at Risk, Groups Warn

WASHINGTON - Several organizations that have been calling for stricter regulatory oversight of investment advisors reacted with dismay to the omnibus federal spending bill unveiled this week, which they say will leave the SEC unable to effectively police the industry and protect investors.

In response, the groups -- including the FPA, the AARP and Consumer Federation of America -- are calling on Congress to enact legislation that would empower the SEC to collect user fees from the firms it regulates to cover the cost of additional examinations.

The $1.1 trillion spending bill that House and Senate lawmakers announced late Monday would set the SEC's fiscal 2014 appropriation at $1.35 billion. That figure is $29 million higher than the commission's budget in 2013, but $324 million less than what the administration had requested.

At that funding level, the SEC will not be able to conduct examinations of advisors and other financial professionals with sufficient frequency or rigor, according to Neil Simon, vice president of government relations at the Investment Adviser Association.

"Simply stated, the omnibus spending bill does not provide the SEC with the additional resources it needs to perform critically important investor protection functions," Simon said in a statement.


The funding proposal comes just days after the SEC announced its own set of examination priorities for the coming year, detailing an ambitious agenda that includes oversight of a new and complex class of advisors to hedge funds and private equity funds who were brought under the commission's purview by the Dodd-Frank Act.

In that guidance, the SEC signaled its intention to step up so-called presence exams to review the newly registered advisors, while also aiming to dispatch examiners to long-registered advisors who hadn't been audited in three years or longer.

But by its own estimates, the SEC acknowledges that at its current funding levels, it is only able to examine a small portion of the growing number of registered advisors.


An outside analysis, published Monday by the law firm Gibson Dunn, notes that the new leadership at the commission -- headed by former federal prosecutor Mary Jo White, who took the reins in April -- has been talking tough about enforcement and compliance, but that its actions haven't necessarily matched the rhetoric. In fiscal 2013, for instance, the number of cases the SEC brought against alleged bad actors dipped 7% from the previous year.

At the same time, advisors and broker-dealers find themselves squarely in the SEC's sights. Of the enforcement cases the SEC brought in 2013 (excluding delinquent filing cases), 25% involved investment advisors or advisor companies, more than any other single target, according to Gibson Dunn's analysis. Broker-dealers, a close second, were targeted in 22% of the SEC's cases last year.

But even with the SEC's focus on advisors, stated in its exam guidance and supported by the Gibson Dunn analysis, the commission lacks the resources to effectively regulate the sector, according to the IAA and others. Those groups cite estimates that some 40% of registered advisors have never been examined by the commission, and, at the nearly unchanged funding level envisioned by the new appropriations bill, the advisor industry will continue to be insufficiently regulated.


"Funding for the SEC has not kept pace with dramatic changes in the marketplace, including the participation of more and more middle-income investors who rely on the capital markets to save for retirement and other important financial goals," warns Barbara Roper, director of Investor Protection at the Consumer Federation of America. "While the lack of resources has hampered many essential functions at the agency, one of the more glaring shortfalls is in funding for the investment adviser oversight program."

The groups are reiterating their calls for members of Congress to take up legislation establishing a self-funding mechanism at the SEC outside of the federal appropriations process. The Investment Adviser Examination Improvement Act, backed by Reps. Maxine Waters (D-Calif.) and John Delaney (D-Md.), would permit the SEC to collect user fees from registered advisors to fund a more rigorous examination regime.

An alternative measure that has been floated in Congress would empower a self-regulatory organization -- in all likelihood, FINRA -- to assume partial responsibility for conducting advisor exams. Neither bill has passed out of the House Financial Services Committee.

In the meantime, votes in the House and Senate on the omnibus appropriations bill are expected this week.



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