Investment Advisers:

Current Level of Oversight Puts Investors at Risk

GGD-90-83: Published: Jun 26, 1990. Publicly Released: Jul 12, 1990.

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Pursuant to a congressional request, GAO reviewed the Securities and Exchange Commission's (SEC) regulation of investment advisers.

GAO found that: (1) since 1980, the number of financial advisers has tripled from about 4,600 to about 14,000, and the assets they manage have increased from about $440 billion to about $4.6 trillion; (2) investment advisers provide investors little assurance that the information they receive is accurate or that advisers operate in accordance with SEC requirements and regulations; (3) the SEC registration program provides little protection for investors, since it does not verify information provided to clients until long after advisers are registered; (4) SEC has no program to identify people who provide advice but never register; (5) SEC has no comprehensive system to provide summary information on inspection results by region or in total; (6) an SEC staff shortage makes it difficult to have a complete oversight program; and (7) SEC does not have the resources necessary to adequately regulate the advisory industry.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress decided that the states would regulate investment advisers with less than $25 million under management and who do not advise any mutual funds. The federal government has exclusive jurisdiction over larger advisers.

    Matter: Given the limited protection provided by the existing federal oversight program, Congress should either take action to strengthen the program or consider repealing the requirements for federal regulation of investment advisers. Regardless of which approach is adopted, the enhancements to the registration and inspection programs recommended by GAO should be included.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC indicates that it does not have the resources to implement this and other recommendations. However, SEC has not determined the staffing needed to do this and other regulatory requirements. It is unlikely any action would be taken unless Congress intervenes on a major financial problem related to investment advisers.

    Recommendation: If oversight continues to focus on the present statutory and regulatory requirements for information disclosure, SEC should require investment advisers to notify potential clients that, although the registration program is intended to disclose information accuracy and business practices, it does not pass judgment on adviser competence.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC has developed a database that it uses to target those advisers found to present the highest risks to investors.

    Recommendation: SEC should require that the oversight program for investment advisers develop summary information on inspection results to help target for reinspection those advisers found to present the highest risks to investors.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: Bills that would have provided SEC with resources to do this have failed to pass in the past 3 Congresses.

    Recommendation: SEC should require that the oversight program for investment advisers reinspect within a reasonable time, such as 6 months, advisers found to have deficiencies that present high risks to their clients.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Not Implemented

    Comments: Bills that would have provided SEC with resources to do this have failed to pass in the past 3 Congresses.

    Recommendation: SEC should require that the oversight program for investment advisers inspect the business operations of each newly registered adviser within a reasonable time, such as within 1 year of registration, and periodically thereafter, according to risk.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: SEC indicates that it does not have resources to implement this and other recommendations. However, SEC has not determined the staffing needed to do this and other regulatory requirements. It is unlikely any action would be taken unless Congress intervenes on a major financial problem related to investment advisers occurs.

    Recommendation: SEC should require that the oversight program for investment advisers register all individuals at advisory firms who give advice.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Implemented

    Comments: SEC believes it does not make sense to systematically examine advertising material to identify advisers who are not registered. Without examining adviser advertisements and registration information, SEC cannot be assured that information provided to investors is accurate and complete. It is unlikely that SEC will take any action unless it is forced to take action.

    Recommendation: SEC should require that the oversight program for investment advisers take action, such as comparing advisers who advertise as such to the list of registered advisers, to identify advisers who should be registered but are not and require them to register or stop providing paid advice.

    Agency Affected: United States Securities and Exchange Commission

  7. Status: Closed - Implemented

    Comments: SEC does not believe it makes sense to use resources to verify educational and business backgrounds of advisers. The SEC registration program provides little protection for investors because background and experience information given to clients is not verified. Given the SEC position on this issue, it is unlikely any action would be taken unless Congress intervenes on a major financial problem.

    Recommendation: SEC should require that the oversight program for investment advisers verify education and experience information that advisers submit on their applications and check their criminal history through all available federal sources before allowing them to be registered.

    Agency Affected: United States Securities and Exchange Commission

 

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