Treasury and Investment Management

Federal Regulation of Investment Advisers

Some state and local governments have augmented their investment programs by retaining investment advisers to perform various portfolio services ranging from advice-only consultation to fully discretionary management. In many cases, the results of these engagements have been favorable, but there have also been cases of reported investment losses resulting from governmental units transacting business with certain investment advisers. Unlike the highly regulated bank trust and mutual fund sectors, federal regulatory inspection of independent investment advisers is presently infrequent and relatively superficial.

The Government Finance Officers Association (GFOA) has consistently recommended that state and local governments exercise caution in their selection of investment advisers and implement an ongoing risk control management program. The Association urges governmental entities considering or retaining independent investment advisers to carefully review the credentials, procedures, and controls of firms offering investment advisory services. Recommended precautionary measures include delivery versus payment, third-party custody arrangements, prohibitions against self-dealing, audits, timely reconciliations, and other appropriate internal control measures.

GFOA supports federal legislation amending the Investment Advisers Act of 1940 to provide the additional resources and authority required by the Securities and Exchange Commission to perform more frequent inspections and more thorough oversight of advisers who conduct transactions involving governmental funds. GFOA further recommends that such legislation include express suitability and bonding requirements for investment advisers.

  • Publication date: June 1992