This appeared on FinancialPlanning.com Feb. 2. Thought it was worth sharing, especially since we discussed it during last week's CFP Ethics Webinar.
The SEC is moving on two fronts to beef up its examinations of investment advisors.
The commission is planning to expand its internal exam staff through a combination of new hires and transitioning examiners from the broker-dealer side of the house, according to a source familiar with the agency's plans.
At the same time, the SEC is pressing ahead with a controversial plan to enlist a third-party organization to examine advisors, a segment of the industry the commission has acknowledged operates with lax oversight. Currently, the SEC's examination office only visits around 10% of RIAs in a given year.
"[The SEC is] going to continue to advance the proposal because the feeling is there's still a critical need to ensure strong compliance from all investment advisors," the source says of the third-party exam initiative.
SEC officials make been making their case to lawmakers for more funding to field more examiners. But those efforts have fallen short, and commission officials have been vocal about their concern that their resources are insufficient to effectively police the industry.
"My sense is every time they've tried to resolve the issue through the appropriations process they've hit a wall," says Duane Thompson, senior policy analyst at fi360, a fiduciary training firm.
On the broker-dealer side, the SEC only handles around 20% of the compliance exams, leaving the lion's share of that work to FINRA. The plan to transition examiners from the broker-dealer wing of its examinations unit to focus on investment advisors is due to get underway in the coming weeks, the source says. Combined with the new hires, that plan would add about 100 RIA examiners, an increase of around 20% that would bring the total number to more than 600.
Word of that initiative drew praise from some industry representatives.
"This reallocation of examination resources is consistent with the evolving registrant population, given that the number of SEC-registered investment advisers has been growing while the number of broker-dealers has been diminishing," Karen Barr, president and CEO of the Investment Adviser Association, says in a statement. "Allocating substantial resources to the adviser examination staff is good, sound public policy that contributes substantially to the SEC's mission of ensuring investor protection and market integrity and will meaningfully augment SEC examination of the advisory profession."
Barr's organization has been much less welcoming of the SEC's proposal to deputize a third-party to conduct advisor exams, warning of the prospect that FINRA could step in to that role.
The group has instead been making the case for an act of Congress to grant the SEC the authority to collect user fees from registered advisors that would be used to fund exams.
Momentum for the user-fee bill, authored in the House by Rep. Maxine Waters (D-Calif.), has waned, and the issue never gained any traction in the Senate. There appears to be little chance that similar legislation could move in the current congress.
"I don't see any prospect for that," Thompson says. "That was a partisan democratic bill and usually minority bills aren't going to go anywhere unless they have significant bipartisan support."
An SEC spokeswoman would not comment on when the proposal to designate a third-party organization might materialize. Chair Mary Jo White has said that she has directed staffers to develop a framework for how such a program might work, including the types of firms the outside examiners would visit, what issues they would be looking for and how they would be trained and supervised.
That proposal has yet to appear on the SEC's crowded regulatory agenda, leaving open the question of whether the commission could shepherd a rule through to its final stage before the end of the Obama administration, a transition period that typically sees shakeups in the leadership of federal agencies.
Thompson anticipates that the SEC could unveil a concept of the third-party exam framework or even a full proposal by this summer, but as to the question of whether it will see it through to completion before the change in administration: "I wouldn't bet the house on it," he says.
"I think it's going to be controversial because you're going to have a split in the advisory community for it," Thompson says. "Mary Jo White is almost certainly going to leave office next January, a year from now, and there's a lot of things she's going to leave unfinished."
Source: Financial Planning
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