SEC weakness allowing investment adviser violations to slip through the cracks

Commissioner Daniel Gallagher says adviser stats likely equal to registered rep stats from Finra

May 9, 2014 @ 5:07 pm

By Mark Schoeff Jr.

A large number of investment advisers may be getting away with violations of securities laws and other misconduct because the Securities and Exchange Commission does not examine them as closely as it does brokers, according to Daniel Gallagher, a member of the commission.

In a speech on Friday, Mr. Gallagher said that a recent review by SEC staff of disclosure information on Finra's BrokerCheck database shows that 20% of the 633,155 registered representatives listed there have between one and five disclosures, or listings, in the database for customer complaints, regulatory violations, terminations, bankruptcy and liens.

Mr. Gallagher said “repeat offenders” threaten “mom-and-pop” investors.

The bad-actor statistics likely would be just as high for the roughly 11,100 investment advisers registered with the SEC, if the agency monitored them in the way that brokers are overseen, Mr. Gallagher asserted.

“In reality, there are plenty of repeat offenders at investment advisory firms who are engaging in misconduct,” Mr. Gallagher said in prepared remarks for the Rocky Mountain Securities Conference in Denver. “We're just not finding them as quickly because the SEC allocates a disproportionate amount of resources to policing the activities of broker-dealers, compared to those we expend policing investment advisers.”

The Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, oversees that sector for the SEC. The SEC examines about 9% of RIAs annually. Finra examines about half of the 4,140 registered brokerage firms under its purview.

Although he didn't mention Finra by name, Mr. Gallagher suggested that an existing self-regulatory organization should be tapped to help the SEC with adviser oversight.

“Simply put, it is impossible to separate the fact that we find many more broker-dealer violations than investment advisor violations from the fact that, thanks to the assistance of the SROs, we examine a greater proportion of broker-dealers than investment advisers,” Mr. Gallagher said.

A bill that would have established one or more adviser SROs died in Congress in 2012, despite strong backing from Finra. Investment adviser organizations fiercely resisted the bill and the notion of Finra oversight. They contended that it would increase regulatory burdens and compliance fees and that Finra's rules-based regulation is anathema to the fiduciary-standard that advisers must meet.

In an interview last month, Finra chairman and chief executive Richard Ketchum said his organization has no plans to revive an SRO bill.

Mr. Gallagher recommended allowing SROs currently involved in broker oversight to extend their reach to investment advisers dually registered as brokers.

“Leveraging the current resources and expertise of broker-dealer SROs to assist in investment adviser examinations could greatly facilitate our ability to examine advisers without undertaking the daunting project, with Congress, of creating a new investment advisory SRO out of whole cloth,” Mr. Gallagher said.

The debate over whether the SEC should impose a uniform fiduciary standard for anyone providing retail investment advice has been skewed by the “potentially false narrative that broker-dealers represent a greater potential threat to retail investors than investment advisers,” Mr. Gallagher said.

The Dodd-Frank financial reform law gives the SEC the authority to come up with a uniform fiduciary-duty rule, which would raise advice standards for brokers. But Mr. Gallagher cautioned his four commissioner colleagues to proceed carefully.

“The commission should slow down and get all of the facts before adding to the long list of rules resulting from these false narratives,” Mr. Gallagher said.

Mr. Gallagher also called for a crackdown on recidivist financial advisers. He noted that one registered representative in the BrokerCheck system has disclosed 96 customer complaints and disputes while another one had filed for 21 bankruptcies. In addition, 17% of brokerages had more than six disclosures and 5% had more than 20.

He said that a task force was created late last year to coordinate SEC and Finra targeting of rogue brokers.

“As an agency, we need to seek out the repeat offenders and revoke their licenses and registration rather than repeatedly mete out injunctions that can be violated and penalties that can be paid from the fruits of misconduct,” Mr. Gallagher said. “They are, to be blunt, cockroaches, and it is in all of our interests to purge them from our markets.”


What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Upcoming Event

Apr 26


Cracking the Code: Making Sense of Alternative Investments

InvestmentNews Research estimates that $150 billion in alternative assets could be added to client portfolios among independent advisers over the next three years. Roughly 85% of all clients are now expressing interest in learning more... Learn more

Accepted for 1 CE Credit by the CFP Board. Pending by Investments & Wealth Institute for 1 credit towards the CIMA® and CPWA® certifications.

Featured video


Geoffrey Brown: What's top of mind at NAPFA?

NAPFA is looking ahead at the rest of 2018 and has a broad agenda that includes improving diversity in the advice industry. What's next? Geoffrey Brown offers his insights.

Latest news & opinion

10 fastest-growing IBDs

These independent broker-dealers saw the biggest percentage gains in their revenue in 2017.

The unique nature of working with celebrity clients

Athletes and entertainers are just like everyone else — aside from complex tax issues, a lack of financial savvy and a need for prenups

Top 10 IBDs ranked by revenue

These independent broker dealers generated the most revenues in 2017.

8 podcasts advisers listen to when they aren't working

Listening to podcasts for the fun of it.

UBS continues to cut loans to recruits, while increasing compensation to brokers

The wirehouse reduced recruitment loans 20% and increased bonus loans 68% in the first quarter.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print