Does Regulatory Jurisdiction Affect the Quality of Investment-Adviser Regulation?

Abstract

The Dodd-Frank Act shifted regulatory jurisdiction over “mid-size” investment advisers from the SEC to state-securities regulators. Client complaints against mid-size advisers increased relative to those continuing under SEC oversight by 30%-40% of the unconditional probability. Complaints increasingly cited fiduciary violations and rose more where state regulators had fewer resources. Advisers responding more to weaker oversight had past complaints, were located farther from regulators, faced less competition, had more conflicts of interest, and served primarily less sophisticated clients. Our results inform optimal regulatory design in markets with informational asymmetries and search frictions.

Keywords: Financial Advisers, Consumer Finance, Financial Misconduct, Fraud, Financial Regulation

JEL Classification: G18, G24, G28, D04, D18, K42