(CN) - The Financial Industry Regulatory Authority's cost projections for the establishment of a self-regulatory organziation for investment advisers, as proposed in the Investment Adviser Oversight Act, are hundreds of millions less than an industry-funded analysis released by the Boston Consulting Group.
In December 2011, the Boston Consulting Group (BCG), on behalf of the Certified Financial Planner Board of Standards and other investment adviser associations, conducted a cost analysis of the three investment adviser oversight scenarios proposed by the SEC study released in January 2011.
In that study, the SEC concluded that the agency lacked the resources to oversee the nation's 12,000 registered advisers and recommended that Congress establish one or more self-regulatory organizations for investment advisers supported by membership dues, with FINRA held up as a model.
In its report, BCG found that the setup costs for FINRA, if it were to develop an SRO for investment advisers, would be $200 - $255 million. It estimated that FINRA's total annual costs would be between $550 and $610 million, including SEC oversight.
FINRA released a one-and-a-half page cost estimate in April, on the same day that Rep. Spencer Bachus and Rep. Carolyn McCarthy introduced the Investment Adviser Oversight Act, which authorizes the creation of an SRO for investment advisers.
Assuming that "all firms would be examined at least once every four years," FINRA determined that its one-time start up cost would be $12 to 15 million, and ongoing costs would total $150 to 155 million annually.
To explain its multi-million dollar divergence from BCG's estimate, FINRA said, "BCG used as its base the costs for establishing the PCAOB [Public Company Accounting Oversight Board] and the CFPB [Consumer Financial Protection Bureau] from scratch. BCG used these figures - set up costs for organizations that didn't even have one desk or employee to start with - and provided for only a 20 percent discount off the from-scratch start-up costs to allow for efficiencies in FINRA's existing infrastructure.
"While FINRA would need to hire additional staff to serve as an SRO for investment advisers, we believe BCG vastly underestimated our ability to leverage existing staff, district offices and the technology underlying our existing nationwide examination program," FINRA stated.
BCG recently released a review of FINRA's cost estimate and found that the fundamental difference between FINRA's $12-15 million estimate of setup costs and BCG's estimate of $200-255 million is that FINRA did not include staff costs.
"BCG['s] analysis included staff costs incurred during the setup period in its estimate of setup costs. These costs include salaries, benefits, and overhead incurred during the setup period. Setup activities include hiring examiners, developing examination process and guidelines and new examiner training," BCG said.
"FINRA reflects all staff costs in its ongoing annual investment costs, and not in its estimate of setup costs," it continued.
BCG also said that FINRA overestimated examiner productivity in its estimate of annual costs. "The difference in examiner productivity is estimated to account for $150-170 million of the difference between the BCG and FINRA estimates," the review stated.
In addition, "the FINRA estimate makes no reference to the costs of SEC oversight of an SRO. BCG estimates these costs at $90-100 million annually," it concluded.
In response to BCG's review, Nancy Condon, a FINRA spokeswoman, told Courthouse News, "Until the Boston Consulting Group has at least one conversation with the SEC and FINRA about what it takes to run a nationwide examination program, their numbers should be viewed with skepticism and amusement. They are inventing the numbers out of thin air."
A statement released by the Certified Financial Planner Board of Standards, one of the BCG report's funders, said, "Investment advisers are overwhelmingly opposed to a FINRA SRO. More than 80 percent of advisers surveyed said they would prefer continued SEC oversight to being regulated by FINRA, an SRO for broker-dealers."