In my 25-year career in the investment-advisory business, I have participated in two examinations, or audits, by the U.S. Securities and Exchange Commission and three by the Idaho Department of Finance. These exams focus on firms’ compliance with federal law and aim to guard citizens from financial fraud.
Today, Idaho investment advisers with less than $100 million in assets under management are regulated by the state. Firms with assets exceeding $100 million are regulated by the SEC.
The Department of Finance seeks to protect investors while promoting legitimate financial transactions. I fully support these efforts. However, the structure of the regulatory system is such that the state is unable to provide oversight of the management of most investment assets owned by Idaho residents.
That’s because the state’s authority is based on where the asset-management business is located, not on where the investor is. When I worked at an out-of-state firm registered with the SEC, I was part of a team that managed more than $100 million of Idaho residents’ investment assets. Yet Idaho was not able to examine them.
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What’s more, even an Idaho investment adviser who manages over $100 million of assets for Idaho residents is not subject to the state’s exams — only the SEC’s.
Because of these rules, the amount of Idaho residents’ investment assets managed by firms subject to SEC examinations are far larger than those of firms subject to the state’s.
The two SEC exams I participated in were over 17 years. The three state exams were over 8 1/2 years and were part of Idaho’s regular cycle of examining firms. I don’t think I am going out on a limb by saying Idaho investors would prefer the higher-frequency alternative.
A certain state examiner can attest to my lack of excitement over the most recent exam. However, this temporary inconvenience for my firm was in the best interests of our citizens and clients. And passing a state examination amounts to an endorsement that we can report to clients.
Subsidiarity is a principle of social doctrine that says all social bodies exist for the sake of the individual. What individuals are able to do, society should not take over. What small societies can do, larger societies should not take over.
Idaho lacks the enforcement powers it needs. It’s time for Idaho to push for a bigger role.