Investment Advisers: Oversight Is Inadequate for Investor Protection

GAO discussed the Securities and Exchange Commission's (SEC) regulation of investment advisers. GAO noted that: (1) SEC requires investment advisers to register and approves completed applications if it does not find any disqualifying securities violations in its files, but does not prescribe professional qualifications for advisers, verify applicants' education and business backgrounds, or have procedures to identify unregistered advisers; (2) SEC staffing limitations affect its inspection capabilities, and SEC completed only 574 inspections in 1991, down from 1,257 in 1990; (3) SEC identified deficiencies in 85 percent of the advisers it examined in 1991, including failure to report operational changes, failure to disclose business relationships and fees to clients, bookkeeping and recordkeeping problems, fraud, and conflict of interest; (4) a securities association estimated that fraud and abuse in the financial planning industry resulted in annual consumer losses of $200 million; and (5) 8 states do not regulate advisers, 21 states do not routinely inspect advisers' activities, and 2 states do not require adviser registration, but the number of states with oversight legislation is increasing. GAO believes that either: (1) SEC regulatory oversight should be strengthened by providing additional resources and requiring SEC to enhance its registration or inspection programs; or (2) the requirements for federal regulation of investment advisers should be repealed.