December 22, 2010
Attached please find the Association for Advanced Life Underwriting comment letter to the SEC, dated August 30, 2010, on its study of broker-dealer and investment adviser regulation required under Section 913 of the Dodd-Frank Act. As extensively described in the letter (see in particular pp. 21-30), AALU believes it is important for the SEC to recognize, as it considers regulatory actions to enhance customer protections, that the significant imbalance that exists in such protections lies with the investment adviser regulatory regime.
Broker-dealers are examined and regulated by the SEC, FINRA and state securities regulators. On average, FINRA conducts an in-depth on-site examination of every broker-dealer firm every 18 to 24 months. In contrast, registered investment advisers have a single regulator (either the SEC or a state securities regulator, generally not both) and are examined on average about once every 11 years. In addition, FINRA audits are not only more frequent but more intense and lengthy, often with a team of compliance professionals who make extensive document requests both preceding and following the audit. The frequency of examination of broker-dealers means that issues will be detected and corrected through the examination process much more quickly than at an investment adviser. The anticipation of a near-term examination also has a deterrent effect on adverse behavior and creates a greater incentive for broker-dealers to continuously monitor and adhere to regulatory requirements.
According to the Commissions most recent budget justification, the Commission oversees approximately 11,500 investment advisers and 5,400 broker-dealers. The Commissions budget justification states that 54% of all broker-dealers were examined by the Commission or an SRO in 2009, and the Commission expects that 55% of all broker-dealers will be examined by the Commission or an SRO in FY 2010 and FY 2011.
Investment advisers are examined far less frequently. In 2009, only 10% of investment advisers registered with the Commission were examined. The Commission has projected that in FY 2010 and FY 2011, only 9% of advisers will be examined. Moreover, as the Commission is well aware, thousands of investment advisers fall under state, not SEC, jurisdiction, and many states simply do not have the capacity or expertise to examine them in furtherance of the important goal of customer protection.
Our letter details additional areas for improvement in investment adviser regulatory oversight. We are therefore submitting the attached letter for the record to assist the SEC in its required study regarding enhancement of investment adviser examinations as mandated by Section 914 of Dodd-Frank. We hope the Commission and its staff find our input useful and informative, and look forward to continued dialogue with the Commission as its important work in this area moves forward.
(Attached File #1: enhancingiaexaminations-31.pdf)