The Regulation of Asset Management Companies

The asset management industry has seen impressive growth over the past twenty years. According to Devlin-Flotz, Henriques, and Sabelhaus (2015), this growth can be credited to the increased popularity of defined contribution plans, evolved investment techniques and preferences, or an appreciation of assets, to name a few. Increasingly, more investors have started to prefer investing indirectly from under asset managers’ safety blanket instead of investing directly by themselves. Due to this, asset managers’ power and influence on the companies they invest in and the investors themselves are pretty significant.

The significant power that asset management firms in Ontario hold is subject to a number of regulations by various governing bodies. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are the main governing bodies. Before that, let’s look at what asset management firms are, what they do, and why they need to be regulated in the first place.

Asset Management Firms: Role, Functions, and Reason for Regulation

An asset management company (AMC) manages funds collected from clients and invests these funds in different areas or asset classes. Profits can be made by investing the capital in various areas such as:

  • Real estate
  • Bonds
  • Stocks
  • Master limited partnerships

These investments are made on behalf of the clients. In other words, asset management firms in Ontario manage public money. They also help with high net worth wealth management. For this reason, asset management companies are also appropriately referred to as money managers or money management firms.

Investors that invest through an asset management company do so for several reasons. One of the biggest is that asset management companies can invest in asset classes that might be out of reach for the investors. For instance, an asset management company can invest in infrastructure projects such as power plants worth billions of dollars.

With this much trust placed in the hands of asset managers, regulations were set in place to protect the interests of clients and investors. The risk of unlawful activity or fraud is controlled by regulations.

Regulation to Manage AMCs

The current regulations around asset management have evolved since the SEC’s inception by Congress, all the way back in the 1930s during the Great Depression. Today, while there are multiple bodies created for the regulation of AMCs, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are two of the main regulating governing bodies.

The SEC is an independent federal government agency that ensures investors and their assets stay protected. They regulate the securities markets and maintain order and fairness within them.

The four prominent laws that control the asset management industry are:

  • The Investment Company Act of 1940
  • The Investment Advisers act of 1940
  • Securities Act of 1933
  • Securities Exchange Act of 1934

Together, these laws ensure the following:

  • Investment companies are mandated to be transparent to investors about financial conditions and investment policies.
  • Investment advisors are regulated. Those advisors with at least $100 million in assets or advising a company registered as an investment company must register with the SEC.
  • Securities are protected against fraud by giving investors the right to all relevant information about securities offered for public sale.
  • SEC is empowered to oversee the entirety of the securities industry.

These measures protect the interests and assets of investors.

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