SEC’s White to increase RIA exams significantly

Securities and Exchange Commission Chairman Mary Jo White is targeting an increase in investment adviser examinations despite the SEC’s struggles to increase its budget.
In a session Tuesday at the Securities Industry and Financial Markets Association’s annual conference in New York, she reiterated that the SEC examines annually just 8% of its nearly 11,000 registered investment advisers.
“I would like to see that number go up as high as it can,” Ms. White said.
She noted that the Financial Industry Regulatory Authority Inc., the broker-dealer regulator, covers annually about 45% of the approximately 4,600 firms registered with the organization.
Ms. White acknowledged that the SEC is hamstrung by the budget battle in Washington.
Like other federal agencies, it is operating on its budget — $1.321 billion, less about $66 million due to sequestration — under a so-called continuing resolution approved by Congress last month. The SEC has requested a $1.674 billion budget for fiscal 2014, in part to hire 250 new investment adviser examiners.
While the SEC plies Congress for more money and meets strong resistance from Republican lawmakers it is trying to increase adviser exams by selectively deploying the firepower that it has. For instance, it is zeroing in on recurring problems that it has noted through sweep exams, such as an uptick in investment advisers’ and brokers’ improperly participating in initial public offerings of stock that they recently sold short.
“We’re not going to take any resources away from bigger frauds and the bigger cases. That would be a huge mistake,” Ms. White said.
“We need to obviously pick our spots.”
As it battles for a bigger budget, the SEC is trying to wrestle to the ground nearly 100 mandatory regulations to implement the financial reform law.
Ms. White said that the SEC would be able to “see the light at the end of the tunnel” on the rules by the end of the first quarter.
She was noncommittal about when or whether the SEC would proceed on a rule that would raise investment advice standards for brokers. The reform law gave the SEC the authority to promulgate a regulation that would establish uniform fiduciary duty for retail investment advice.
Ms. White said that consumers are confused about the differing standards that investment advisers and brokers must meet.
Advisers have to act in the best interest of their clients. Brokers adhere to a less-stringent standard that requires them to sell products that are suitable for their clients, even if they come with higher fees than available elsewhere in the market.
“It is a high priority for me to figure out what we should do,” Ms. White said. “It is a question for the commission to decide.”
Ms. White was similarly circumspect about whether the SEC will propose a rule to end mandatory arbitration clauses in brokerage client contracts. The reform law gave the SEC authority to advance a regulation.
“It is something we will look into,” Ms. White told reporters on the sidelines of the SIFMA conference.