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SEC says advisers are under-regulated

The $5-trillion financial planning industry is so under-regulated that most of the 17,000 firms offering investment advice will never be inspected for possible fraud, the Securities and Exchange Commission chairman said Thursday.

Richard Breeden said his inspection staff is spread thin and only advisers managing at least $1-billion in assets are targeted for an SEC inspection about every three years.

That means smaller professional money managers or counselors are checked only about once every 30 years, "which in most cases means never at all," Breeden told the securities subcommittee of the Senate Banking Committee.

He said the number of professional money managers and counselors has exploded since 1981, from 4,580 to 17,500. In the same period the number of SEC staffers assigned to checking up on investment advisers also grew _ from 36 to 46.

Sen. Christopher Dodd, D-Conn., the subcommittee chairman, called the tiny number of inspectors "staggering," adding: "It's just unacceptable that we have 46 people looking over the shoulder of 17,000."

Firms or individuals, with some exceptions, must register with the SEC if they give financial advice for pay. But after paying a one-time $150 registration and undergoing a preliminary inspection, they can go years, even decades, without having to account to federal regulators _ unless there are complaints.

Breeden said the recent indictment of a Newport Beach, Calif. investment adviser who managed $1.2-billion in funds for dozens of communities in California, Colorado and Iowa underscores the need for a tough cop on the beat. Breeden said the clients of money manager Steven D. Wymer may have suffered losses exceeding $100-million.

He said the value of assets managed by financial planners totals about $5-trillion.

The SEC chief wants authority to fund more frequent inspections through higher fees or else he thinks the program should be scrapped so consumers won't think "there is oversight where it does not exist."

Higher fees ranging from about $300 to $7,000 a year would be based on a sliding scale determined by the size of the assets an adviser had under management.

Such a move would have to be approved by Congress because it would mean altering the Investment Advisers Act of 1940.

Three investors victimized by crooked financial advisers urged the passage of legislation increasing the fees on the industry.

"These people are skilled at conning their clients, and will continue to prey upon innocent victims unless they are properly policed," testified Elizabeth Faitella, of Unionville, Conn., a public school secretary who lost more than $30,000 investing in rare coins on an adviser's recommendation.

The "personalized portfolio" supposedly created for her and her husband also was offered to other investors, she said. And key officials of the firm she dealt with allegedly defrauded 1,000 customers in New York state.

Arthur Shapiro, a Miami Beach physician, lost $500,000 to an unregistered financial planner who embezzled $13-million from doctors in the Miami area. Schapiro said half the money lost was invested from his office pension account "thus stealing retirement money from me, my family and my eight employees."

The move to step up oversight through higher fees also was supported by at least two industry groups: the Investment Counsel Association of America, a 160-member group representing personal investment managers, and the Investment Company Institute, the trade association for 3,400 mutual funds.

In addition to increased fees, Breeden called for requirements that would bar advisers from making recommendations that are not suitable to each customer's needs. That would prevent advisers recommending high risk investments to clients who couldn't afford losses.

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