Citing the Securities and Exchange Commission’s (SEC) “abysmal” number of annual investment advisor examinations, the top Democrat on the House Financial Services Committee is calling on its Chairman to consider legislative proposals that would increase these reviews.

In a letter to Committee Chairman Jeb Hensarling (R-TX), Ranking Member Maxine Waters (D-CA) noted that despite consumers’ growing reliance on advisers for investment decisions related to college tuition and retirement, less than 10 percent of these advisers are examined each year. Underscoring this disparity, the Ranking Member asked Hensarling to convene a hearing of the full Committee to consider various legislative proposals that would increase the levels of examinations of investment advisers.

One of these proposals is H.R. 1627, the Investment Adviser Examination Improvement Act, authored by Rep. Waters and Congressman John Delaney (D-MD). The bill, which has been cosponsored by 17 of the 28 Democrats on the Committee, would provide the SEC with the authority to impose and collect user fees on investment advisors in order to bolster its oversight program.

“Despite Americans increasingly relying on the financial advice of investment advisers to save for retirement, college, and other investment decisions, the Securities and Exchange Commission (SEC) only examines 9 percent of these advisers a year. Such an abysmal examination record does nothing to promote confidence in these advisers, let alone in our markets,” Waters wrote. “I believe the time is right for the Committee to conduct this review.  Hardworking Americans saving for the future, as well as the investor adviser community, deserve to know that everyone is complying with the law.”

Since the financial crisis, public confidence in our financial markets has deteriorated. Yet insufficient funding continues to undercut the SEC’s ability to oversee the 11,000 advisers that manage nearly $50 trillion in assets. In fact, the agency examines these advisers on average only once every 12 years, and 40 percent of advisers have never been examined.

In the letter, Waters also noted that the Committee’s oversight plan for the 113th Congress makes clear it will “review proposals that would harmonize the frequency of examinations of broker-dealers and investment advisers.” 

Full text of the letter is below. A signed copy can be found here.

July 11, 2014

The Honorable Jeb Hensarling
Chairman
Committee on Financial Services
2129 Rayburn House Office Building
Washington, D.C.  20515

Dear Mr. Chairman:

Despite Americans increasingly relying on the financial advice of investment advisers to save for retirement, college, and other investment decisions, the Securities and Exchange Commission (SEC) only examines 9 percent of these advisers a year. Such an abysmal examination record does nothing to promote confidence in these advisers, let alone in our markets. Accordingly, I respectfully request that you convene a full Financial Services Committee hearing to consider various legislative proposals, including H.R. 1627, the Investment Adviser Examination Improvement Act, to increase the levels of examinations of investment advisers.

Today, even though SEC is responsible for overseeing 11,000 advisers that manage nearly $50 trillion in assets, the agency examines these advisers only once every 12 years, and 40 percent of advisers have never been examined. To put this in perspective, brokers and dealers registered with the Financial Industry Regulatory Authority (FINRA) are examined every other year. Though the vast majority of investment advisers operate with integrity, Congress, the adviser community, investor advocates and the SEC all agree that the SEC’s levels of examination need to improve to help restore trust in our financial markets. 

Congress recognized these concerns when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, directing the SEC to study the issue.  The SEC concluded adviser exams needed to be increased, but that funding challenges prevented the SEC from doing so, and provided three options to Congress. Building on the first recommendation, Representative Delaney and I introduced H.R.1627 to authorize the SEC to levy user fees on advisers to solely fund additional examinations.  This approach has been endorsed by SEC’s Investor Advisory Committee, the investment adviser community and investor advocates. In the previous Congress Representative Bachus proposed a discussion draft that incorporated the SEC’s other two recommendations to create a self-regulatory organization (SROs) or multiple SROs, charged with examining advisers. This proposal was echoed in part recently by Commissioner Gallagher, who argued that third-party consultants could be used to increase oversight.

I note that the Committee’s oversight plan for the 113th Congress states that the “Committee will review proposals that would harmonize the frequency of examinations of broker-dealers and investment advisers.”  I believe the time is right for the Committee to conduct this review.  Hardworking Americans saving for the future, as well as the investor adviser community, deserve to know that everyone is complying with the law.

I appreciate your attention to this request.

Sincerely,

MAXINE WATERS
Ranking Member

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