A rule proposed by the Securities and Exchange Commission (SEC) that may enforce transparency among investment advisers may soon have those advisers paying for costly annual examinations of client assets. However, the Securities Industry and Financial Markets Association (SIFMA), a trade body representing the capital markets, says the eight grand cost estimation put forth by the SEC will more likely run into the hundreds of thousands, if not millions, of dollars. Currently, only registered advisers with custody of client assets and that send out account statements to clients must undergo an annual examination. But the SEC’s proposed rule would require all registered advisers with custody of client assets to hire an independent public accountant to perform an annual surprise review of client assets. Industry players face a tricky position between a desire to protect investors’ assets and the cost-inefficiency of shelling out as much as $200,000 each year to do so. In a recent letter signed by SIFMA, private client legal committee chair Mark Shelton, the industry group acknowledged that “recent scandals involving misappropriation and other misuse of investors’ assets” prompted the formation of the rule. But the letter urges SEC secretary Elizabeth Murphy to reconsider some of the rule’s adverse effects. “[F]or advisers that are dually registered as broker-dealers, and for advisers to wrap fee programs for which a broker-dealer maintains custody of assets,” the letter reads, “SIFMA believes that the cost of a surprise examination and an internal control report greatly outweighs any potential benefits to clients, and that these two additional requirements would duplicate existing safeguards afforded to advisory clients of dual registrants.” Chiefly, SIFMA disagrees with the $8,100 annual price estimated the SEC for a surprise examination. The group noted that the size of the advising firm, the number of its accounts, number of its custodians and number of its holdings all work as variables in determining the cost of such a review. “SIFMA suggests that this [$8,100] figure significantly underestimates the actual cost of such an examination, particularly if the verifications are required to be undertaken on an account-by-account, asset-by-asset basis,” the letter reads. SIFMA surveyed 17 member broker-dealers and their accounting firms, which estimated the actual cost anywhere between $8,000 and $1m, with a survey-wide average indicating a typical cost of a little more than $200,000. The group also estimated an average $250,000 cost for the internal control report, the same estimate provided by the SEC. Combined, however, the average cost of an examination and report could far outweigh any benefit enjoyed by the investor clients. SIFMA said advisory firms dually registered as broker-dealers already follow strict regulatory oversight. Requirements to conduct surprise examinations and form internal control reports may even double up on regulations already being followed. Write to Diana Golobay.