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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Highlights
Pursuant to a congressional request, GAO reviewed the Securities and Exchange Commission's (SEC) regulation of investment advisers.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| 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. |
Closed – Implemented
|
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. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| United States Securities and Exchange Commission | 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. |
Closed – Implemented
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.
|
| United States Securities and Exchange Commission | 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. |
Closed – Implemented
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.
|
| United States Securities and Exchange Commission | SEC should require that the oversight program for investment advisers register all individuals at advisory firms who give advice. |
Closed – Implemented
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.
|
| United States Securities and Exchange Commission | 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. |
Closed – Not Implemented
Bills that would have provided SEC with resources to do this have failed to pass in the past 3 Congresses.
|
| United States Securities and Exchange Commission | 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. |
Closed – Not Implemented
Bills that would have provided SEC with resources to do this have failed to pass in the past 3 Congresses.
|
| United States Securities and Exchange Commission | 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. |
Closed – Implemented
SEC has developed a database that it uses to target those advisers found to present the highest risks to investors.
|
| United States Securities and Exchange Commission | 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. |
Closed – Implemented
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.
|