How Are Asset Management Firms Regulated?

Regulation is an important part of the financial industry. Oversight helps keep capital flowing freely throughout the market. But it also helps protect the interests of consumers and investors by shielding them from too much risk and fraud at the hands of unscrupulous professionals.

The asset management industry is largely governed by two bodies—the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Although they are separate, there is an overlap between these and other agencies. In fact, the regulatory picture facing a particular firm can get rather complex. Keep reading to find out more about how these and other agencies regulate the asset management industry and keep them in check.

Key Takeaways

• Asset management firms provide their clients with advisory and financial planning services and investment strategies.
• The SEC regulates investment advisors over $110 million in assets under management.
• FINRA enforces SEC rules and regulations among members and is responsible for overseeing brokerage firms and individual brokers. 
• Other agencies that regulate asset managers include the Federal Reserve, the U.S. Treasury, and the Federal Deposit Insurance Corporation (FDIC).

What Is the Asset Management Industry?

The asset management industry is just one part of the broader financial services sector. It is made up of different investment firms that offer a wide variety of services such as advisory services and financial planning. They also provide their clients with investment strategies and options such as mutual funds, equities, fixed income, private investment funds, and exchange-traded funds (ETFs). These services and strategies are tailored by an asset manager—a financial professional employed by the firm.

Securities and Exchange Commission

The Securities and Exchange Commission (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.

Any firm that gives investment advice in securities is considered an investment advisor. This includes firms that manage client portfolios. The SEC regulates investment advisors over $110 million in assets under management (AUM). Advisors who manage assets below this level are required to register with their states, as well as any representatives of investment advisors.

Important

Registration doesn’t mean an advisor is endorsed by the SEC. It does mean that the advisor agrees to adhere to the agency’s rules.

The SEC asserts that registration is not an endorsement of any given investment manager or adviser. Instead, 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.

Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority—commonly referred to as 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 has the responsibility of 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 the regulation of both SEC and FINRA. In practice, a firm may have brokers registered with FINRA who are also registered investment advisor representatives. This means that a single asset manager could be subject to oversight and audits by both bodies.

Other Regulatory Agencies

The SEC and FINRA aren’t the only bodies that regulate asset management firms and their investment advisors. Other bodies that regulate the financial industry include:

• The Federal Reserve: Commonly referred to as the Fed, this is the central bank of the United States government. It controls monetary policy and helps maintain and ensure that the country’s financial system is both stable and safe.
• The U.S. Treasury Department: This department oversees the collection of taxes and management of the government’s finances. The Treasury is also responsible for issuing bonds, banknotes, and coins.
• The Federal Deposit Insurance Corporation (FDIC): The FDIC insures all deposits up to $250,000 per insured bank. This helps protect consumers in the event of bank failure.
• The Office of the Comptroller of the Currency (OCC): This agency is responsible to enact and enforce national banking regulations in the United States. Its main agenda is to ensure consumers are treated fairly and equally and that financial institutions operate safely.

Firms and advisors are also subject to regulation by state authorities and 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 may 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 that financial industry companies often face. To address areas of conflict or confusion, the Dodd-Frank Wall Street Reform and Consumer Protection Act—usually referred to as Dodd-Frank—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.

What Types of Companies Are Regulated by the SEC?

The Securities and Exchange Commission (SEC) oversees companies that are part of the securities industry, which includes investment advisors, investment companies, and broker-dealers.

Are All Companies Regulated by the SEC?

Smaller companies generally only need to file SEC reports if they have over $10 million in assets and 500 or more shareholders. They must also file SEC reports if they trade on a U.S. exchange.

Who Needs to Be Licensed By FINRA?

Anyone who is involved in the securities business of a firm must be registered with FINRA and pass competence exams. This includes salespeople, supervisors, partners, managers, directors, and officers.

What Does the FDIC Not Insure?

The FDIC does not insure stocks, annuities, mutual funds, bonds, or life insurance policies.

The Bottom Line

Asset management firms are regulated by different federal agencies. Investment advisors that manage more than $110 million in assets are regulated by the SEC. FINRA is responsible for enforcing SEC rules and regulations, as well as overseeing both individual brokers and brokerage firms.

Other agencies that regulate asset managers and management firms include the U.S. Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC).