Wednesday, November 11, 2009

State Regulators May Supervise More Registered Investment Advisers

One of the items being kicked around in Congress right now is to allow the SEC to handoff to the individual state regulators the regulation of registered investment advisers with total assets under management of $100,000,000 or less. This would make a whole lot of sense. I read at Investment News online today,, that the SEC only reviews about 9% of all registered investment advisers each year. This means that 91% are not being examined.

The bulk of all registered investment advisers are in the $100,000,000 and less category. Currently, if you have $30,000,000 or more, then you must be registered with the SEC. By raising the threshold, then the bulk of registered investment advisers would fall back to the states for supervision. Of course in this economic environment, we may see a lot of understaffed and underfunded state securities regulators with a lot more on their plates. Nevertheless, something good may come out it, like new jobs!

Here is an example of the problem with regard to the current regulatory environment. Let us suppose that a registered investment adviser has $50,000,000 under management. Further, let us assume that this registered investment adviser is doing something unethical enough to be shut down. If only 9% of the registered investment advisers are examined each year by the SEC, how long could this unethical firm continue to operate? Theorectically, they could probably go on for a few more years, perhaps even five or six more years before the SEC ever got around to examining them. The state regulator's hands are tied, since they do not have jurisdiction. Even if they were to clue the SEC in on the unethical activity, there is no guarantee that the SEC would deem it serious enough to swoop in immediately. Or, the SEC may have other pressing issues that they deem to be more important.

Contrast this with the same firm being under state regulation now. The state regulators, who are more aware of what is going on with the unethical firm, would have nothing in their way to go in for a surprise exam. They could go in and clean things up.

All in all, I totally agree with the idea to raise the minimum assets under management to be registered with the SEC from $30 million to $100 million. Let us hope that they can get this done.