How Are Asset Management Firms Regulated?

In principle, the asset management industry is largely governed by two bodies: the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). However, in practice, there is overlap between these and other agencies; the regulatory picture facing a particular firm can get rather complex.

The SEC was established in 1934 by the Securities Exchange Act and is an independent government agency. It is mandated with protecting investors and ensuring fairness in securities markets. The SEC has broad regulatory powers relating to U.S. securities markets, including the oversight of exchanges and the enforcement of regulations. The SEC regulates investment advisers that have over $110 million in assets under management. Below this level, investment advisers are required to register with their states, as are the representatives of investment advisers.

Any firm that gives advice with respect to investing in securities is considered to be an investment adviser. This includes firms that manage portfolios for clients. The SEC is very vocal in stating that registration is not an endorsement of any given investment manager or adviser; it just means that the firm has made certain disclosures and agrees to adhere to SEC rules. Firms regulated by the SEC are subject to unscheduled audits.

FINRA is a self-regulating organization that operates under the scope of the SEC. It is charged with enforcing SEC rules and regulations among its members, and it has wide responsibility for overseeing the activities of brokerage firms and individual brokers. Anyone who sells securities to the public as a stockbroker or as a representative of a broker-dealer is almost certainly regulated by FINRA.

There is a relatively large overlap between FINRA and SEC regulation. In practice, a firm might have brokers registered with FINRA who are also registered investment adviser representatives. A single asset manager could be subject to oversight and audits by both bodies.

Other bodies regulating the financial industry include the Federal Reserve, the Treasury Department, the Federal Deposit Insurance Corporation (FDIC), Commodity Futures Trading, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. There are also state regulatory agencies.

There is a degree of regulatory complexity for large multi-strategy firms participating in numerous asset management and other activities. An investment bank with an asset management division, a wealth-management division and a traditional banking arm might be regulated by the SEC and FINRA as well as the Federal Reserve, the Treasury Department and the FDIC.

There are overlapping and sometimes contradictory regulatory frameworks facing financial industry companies. To address areas of conflict or confusion, the Dodd-Frank Act established the creation of the Financial Stability Oversight Council (FSOC). The FSOC acts as a coordinating body charged with simplifying bank regulation and monitoring systemic risks facing the financial industry.