In recent speech to attendees at a Dallas securities conference, Rick Fleming, the Director of the SEC Office of the Investor Advocate (“OIA”), recommended that the SEC be allowed to hire more SEC examiners and to collect annual “user fees” from registered advisers for the purpose of funding more frequent SEC examinations.

To justify the need for more frequent examinations, Fleming remarked that at current examination rates investment advisers can expect to be examined by the SEC only once every 11 years. A primary reason for such a low rate of exams appears to be the slow growth of SEC resources over the past 10 years relative to the increasing number of advisers and assets under management during the same period. The SEC, as currently constructed, has had a difficult time keeping up with the growing number of registered advisors, especially in light of the additional examination burdens imposed on the SEC following the enactment of Dodd-Frank. In the past decade, the number of SEC-registered advisers has grown by approximately 40 percent and assets under management has more than doubled, while the SEC office responsible for examining those advisers has grown by a mere 10%.

While Fleming notes that many industry associations and experts have endorsed the concept of user fees, including David Tittsworth, President of the Investment Advisor Association, the concept of a user fee is not without its detractors.

First, Fleming indicates that there is a philosophical objection to expanding government regulatory authority, especially in light of significant SEC budget increases in the years following the financial crisis. However, while spending by the Office of Compliance Inspections and Examinations (“OCIE”) has indeed increased, Fleming notes that the increasing number and complexity of registrants far outpaces the growth in OCIE spending. Further, certain other major expenditures have accounted for much of the overall increase to the SEC budget, such as EDGAR modernization and the development of other technological innovations by the SEC. As a result,

the rate of examinations and the available resources to conduct them has not adequately increased.

Second, some opponents of the user fee concept simply believe there are more viable solutions, such as requiring advisers to hire third-parties to conduct SEC-style examinations. However, Fleming notes the conflicts of interest inherent when the examinee selects and compensates the examiner. Further, Fleming presumes the expense of such audits would actually be more burdensome that annual user fees.

The push for user fees is a relatively recent, but not entirely new development. Fleming’s remarks echo recommendations made by the OIA in an earlier June 30 report to Congress. In 2013, Rep. Maxine Waters, D- Calif., introduced a bill (The Investment Adviser Examination Improvement Act of 2013 (H.R. 1627)), that would allow the SEC to collect user fees. In the period since this bill was introduced, Mr. Fleming and the OIA are merely the latest to join the growing chorus of voices endorsing the concept of charging registered advisers a user fee to fund the SEC’s examination activities. Winston & Strawn will continue to monitor this situation as it develops.