The Bigger You Are, the Less You Are Regulated?

I read an article in the InvestmentNews online publication this past week, “Regulators to crack down on phony AUM” by Dan Jamieson.  It was a very good article with some interesting facts.  Registered investment advisors (RIAs) are required to report on an annual basis the assets under management (AUM).  For obvious reasons, RIAs may be tempted to overstate this number to enhance its marketing efforts.  After all, we have grown up in a society where bigger is better. Everyone wants to be investing with those that are handling lots of money, rather than with an advisor who only has a handful of clients.


Under the Dodd-Frank Act, firms with AUM over $100 million must register with the Securities and Exchange Commission (SEC) while firms under that threshold must register with state securities regulators.  Now comes the part of the article that I had to re-read several times.  According to the article, state securities regulators generally conduct examinations more frequently than the SEC.  Ok, let me write that a different way: RIAs with AUM under $100 million may get examined more frequently than larger RIAs with AUM over $100 million.  Does anyone else have a problem with this?


As the article goes on further, to explain that in many cases, there are real problems with calculating AUM correctly.  Under Dodd-Frank, there is a new method of calculating AUM with the moniker “regulatory assets under management.”  These new changes seem to inflate the AUM of an RIA, thus potentially elevating them to the higher $100 million threshold and possibly not being regulated as frequently.


The article did go on to say that the SEC will be monitoring the filing of ADV (the form used to report AUM) much more closely than ever before.


I would rather the SEC spend more time examining the RIAs with AUM over $100 million than determining if they properly added up their AUM.  But, that’s just me.


Click here for the article.


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