Financial reform legislation passed by the House of Representatives (HR 4173) would allow the SEC to collect fees from investment advisers designed to defray the SEC’s cost of inspecting and examining them.

Unless FIN RA or some other self-regulatory organization was given responsibility for investment advisers, it seems inevitable that the SEC will, in the future, be devoting substantially more resources in this area. Under H.R. 4173, however, the amount and structure of the fees that the SEC could impose for this purpose would be largely within the SEC’s discretion. Under this “self funding” arrangement, the SEC’s ability to expand its investment adviser examination/inspection program (and the attendant costs to advisers), would be subject to few practical limitations.

Accordingly, H.R. 4173 would greatly increase the possibility of “overregulation,” as compared with the historical procedure under which the SEC generally has been able to expend only such amounts as have been specifically appropriated to it by Congress.

The risk of such overreaching by the SEC may be even greater under the draft financial regulatory reform bill currently under consideration in the Senate. That is because the Senate draft would permit the SEC to “self fund” (i.e., through fees it prescribes, rather than through Congressional appropriations) a broader range of its activities.

Even in areas where the SEC is not permitted to self-fund its activities, Congressional appropriations are likely to increase substantially. Wholly apart from the investment adviser examination/inspection program, for example, H.R. 4173 would double the SEC’s budget over the next few years.

Under any likely scenario, firms within the SEC’s jurisdiction should probably assume that substantial increases in the SEC’s resources will result in more rigorous regulation going forward. On the other hand, financial reform bills such as discussed above would assign many significant new tasks and responsibilities to the SEC, which would absorb at least some of the agency’s increased resources.