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Congress ignores ticking time bomb of investment fraud

Notwithstanding that the SEC generates significantly more revenue for the U.S. Treasury than it costs to maintain and operate –  the SEC pays for itself many times over – House appropriators may be correct in contending that the SEC can manage without every portion of the agency’s requested funds.  However, the House bill’s failure to provide funding for Chairwoman White’s goal of hiring 250 new examiners in fiscal 2014 is so shortsighted as to be almost negligent.

It is only a matter of time before the consequences of this negligence become painfully apparent.  When that happens, the House of Representatives may well see fit to act, but such belated action will come as cold comfort to investors who are victimized by swindlers in the meantime. The time to act is now.

{mosads}Currently, the SEC has resources only to examine approximately 8 percent of the roughly 11,000 federally registered investment advisers (IAs) nationwide. The average SEC-registered investment adviser is looked at by regulators only once every 10 to 13 years, and the frequency of SEC examinations of investment advisers has decreased 50 percent since 2004.  Moreover, some 40 percent of advisers registered with the SEC, and nominally policed by the federal government, have, in fact, never been examined.

These numbers terrify me, and they should terrify Congress, too.

As a securities regulator, I have seen the tragedy that can be wrought by investment fraud too many times, and it is heart wrenching.  We tend to think of investment fraud as a “white collar” crime, with few real victims.  Nothing could be further from the truth.

When a person loses their retirement savings to fraud, the devastation can be so total and the suffering so immense that many, if not most, never fully recover.  To be victimized by investment fraud means more than the loss of funds: often it means the loss of all security, including one’s home, the inability to care for a sick loved one or send a child to college, or the need to go back to work in old age.

Investment fraud, like all crime, cannot be prevented in every instance. However, for nearly a century the government has recognized an obligation to detect and deter fraud by registering and regulating individuals who provide investment advice and sell investment products to the public. Nevertheless, in recent years, the federal government has been failing in this obligation.

If Congress is unwilling to appropriate sufficient funding for the SEC to conduct enough IA examinations to credibly detect and deter fraud, it has a second option: authorize the SEC to fund more frequent examinations by assessing “user fees” on the large IAs it examines, and remit this fee revenue directly back into its IA examination program. This idea was recommended by the SEC staff in a 2011 report regarding IA examinations, and it is at the heart of legislation introduced in the House by Rep. Maxine Waters (D-Calif.) as H.R. 1627, the Investment Adviser Examination Improvement Act of 2013. 

Waters’ legislation is supported not only by state securities regulators like me, but also by investor advocacy groups and major investment adviser trade associations, and it deserves serious consideration by the 113th Congress.

Her bill would address the present, critical shortfall in IA examination resources. By enacting structural changes to enable the SEC to access a scalable source of revenue outside of the appropriations process, Waters’ bill would also go beyond the present crisis and permanently close the gap in the investor protection safety net that results from inconsistent and often inadequate amounts of Congressional appropriations.

Importantly, under Waters’ bill, the revenue the SEC derives from user fees could be spent only to maintain robust examinations, and not for any other purpose; thus, all SEC rulemaking activities would remain directly under the budgetary control of the Congressional appropriations committees.

Waters has offered a common sense solution to defuse a ticking time bomb.

Abshure, a former SEC attorney, is Arkansas Securities Commissioner and president of the North American Securities Administrators Association.


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