Advisor Exams Top Priority at SEC

Shutterstock photo

WASHINGTON -- The SEC has a numbers problem.

With roughly just 10% of RIAs subject to an examination each year, commission officials, industry leaders and members of Congress all agree that oversight of the industry is insufficient.

But what is the best course of action to address that deficiency?

That question led discussions at the Investment Adviser Association's annual compliance conference on Capitol Hill, where SEC officials were reluctant to elaborate on the efficacy of a proposal under development to deputize a third-party organization to help the commission conduct advisor exams.

"I think there are many, many questions in this area," SEC Commissioner Kara Stein said.

Those uncertainties include what type of organization would be a good fit to help with advisor oversight, what authority it would act under, the scope of the exams and, especially, how much of a cost the industry would have to bear.

So Stein said that she is taking a wait-and-see approach, hedging on the relative merits of a third-party exam proposal that SEC staffers are expected to produce this year.

"I think we're struggling to think through, again, how to enhance and modernize our regulatory scheme or the way that we actually regulate investment advisors," she said. "I tend to look at the facts and circumstances right before me, and I don't have any right now."

However, Stein acknowledges that the current examination rate is inadequate. Responding to that shortfall, the Office of Compliance Inspections and Examinations recently began transitioning some 70 examiners from the broker-dealer side of the shop to the unit that conducts exams of investment advisors and investment companies.


OCIE Director Marc Wyatt indicated his organization would likely continue shifting exam resources over to the advisor and investment company side.

"I would think so," Wyatt said. "We think for the risks that we have in the marketplace, our best capital allocation, resource allocation, will continue to be to the IA/IC space."

For her part, Stein hailed the move by OCIE to reallocate examiners to the RIA space, noting the challenge that the commission faces in keeping up with the continued growth of registered advisors.

"I think that's a really positive development," Stein said. "We have more and more people registering as investment advisors than we have in the past."

The SEC has been tackling the issue of advisor exams in other ways. The agency has been looking to hire more examiners, both by reallocating its existing budget and by appealing to lawmakers for an appropriations increase.

Additionally, Stein noted that the commission has been investing more heavily in technology and personnel to make better use of the industry data that it monitors to identify the firms that pose the greatest risk to investors or to the stability of the markets.

That issue of market stability and systemic risk has become an animating feature of much of the commission's work in the aftermath of the financial crisis. That focus is borne out in initiatives like the ongoing development of new rules for the asset-management industry, for instance. Some observers trace that and other efforts back to the SEC's involvement with the Financial Stability Oversight Council, a consortium of regulatory agencies organized under the Treasury Department.


In the area of advisor exams, the commission has been focusing its efforts on the largest firms in the industry. So while the SEC has only been getting to 10% of registrants in a year, those practices account for about 30% of the assets under management in the advisor space.

Exams have long been an area of concern for the Investment Adviser Association. The group fought hard to defeat a proposal that would have authorized the SEC to designate a self-regulatory organization to help oversee advisors. On the other side, the IAA has been unsuccessful in its efforts to gin up support on Capitol Hill to enact legislation that would give the SEC the authority to collect user fees from its advisor registrants to conduct exams.

Of the SRO proposal, the IAA warned that FINRA would be the most likely outfit to take on advisor exams, performing a similar role there as it does in the broker-dealer space. Neil Simon, the IAA's vice president for government affairs, said that he still worries that FINRA could step into the RIA sphere under the third-party program the commission is exploring.

Given the new influx of staff to the IA advisor team and the methods OCIE is developing to target the highest-risk areas, might the SEC not be advised to hold off before pursuing an entirely new regulatory framework?

"To me, this argues for being cautious about any new programs like third-party reviews," Simon said. "Let's see what the effect is of this reallocation of resources to advisor exams before outsourcing what we believe is a governmental function."

This article was originally published on Financial-Planning.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© 2016 SourceMedia, Inc. All rights reserved. Content originally published in Financial Planning. No further distribution, reuse, or republication permitted without the written consent of SourceMedia Inc. For more from Financial Planning, go to: http://www.financial-planning.com/.

More from Financial Planning


Financial Planning

Financial Planning

Research Brokers before you trade

Want to trade FX?