IAA cautions SEC Commissioner Gallagher about third-party adviser exams

Tittsworth letter encourages agency to reallocate existing resources to bolster examinations

Jun 10, 2014 @ 1:00 pm

By Mark Schoeff Jr.

SEC Commissioner Daniel Gallagher
+ Zoom
SEC Commissioner Daniel Gallagher (Bloomberg News)

A leading investment-adviser organization raised concerns about regulatory examinations being conducted by private-sector firms instead of the Securities and Exchange Commission in a letter to the SEC member who is championing the change.

In speeches and public appearances over the last month, SEC Commissioner Daniel Gallagher has recommended the SEC write a rule that would require advisers to hire an examiner to review their operations. The measure would be similar to one the agency adopted in 2009 that mandates that advisers who maintain custody of client assets bring in an auditor to verify the funds are safe.

Third-party exams would allow the SEC to reach more advisers, according to Mr. Gallagher. The agency says it has the resources only to examine annually about 9% of the approximately 11,000 registered investment advisers.

In a June 9 letter to Mr. Gallagher, the Investment Adviser Association cautioned him about drawbacks of his proposals.

“We are concerned about the potential disadvantages of third-party examinations as compared with SEC examinations,” wrote David G. Tittsworth, the IAA executive director. “Such issues include the standards to be applied in such examinations, the scope and frequency of any such examinations, the qualification and SEC oversight of third parties, confidentiality and the cost to advisers.”

Prior to considering a rule, the SEC should assess third-party reviews voluntarily used by advisers such as financial audits, internal control reports, compliance reviews, mock audits and internal audits, the letter stated.

“Before engaging in any rulemaking that would require SEC-registered advisory firms to undertake an examination or other review by a third party, it would be helpful to understand what practices are already undertaken, how such practices are utilized, the types of third parties retained and the costs involved,” Mr. Tittsworth wrote.

In an interview on June 6, Mr. Gallagher defended third-party exams for advisers.

“It’s the best idea I’ve heard,” Mr. Gallagher said. “I’m the only person out there I see proposing something we can do ourselves rather than begging Congress for money.”

He is confident that he can build support for his proposal.

“I’ve heard from a lot of people on this issue,” Mr. Gallagher said. “I think it has legs.”

Although the SEC has not received from Congress the funding it says it needs to hire 250 additional investment-adviser examiners, Mr. Tittsworth said the agency could increase adviser coverage by shifting some of the money it spends on broker-dealer oversight to investment advisers.

“We encourage the commission to consider reallocating its existing resources to increase investment adviser examination activity, which it could accomplish without additional legislation or rulemaking,” Mr. Tittsworth wrote.

He also took issue with Mr. Gallagher's assertion that the SEC is finding more broker-dealer violations than investment-adviser infractions because it has the help of a self-regulatory organization, the Financial Regulatory Authority Inc., to oversee brokers.

Mr. Tittsworth said SEC examinations of advisers cover a significant amount of assets under management; that the agency analyzes all advisory firms on an ongoing basis, even if it doesn't formally examine them; and that the total number of registered advisers is overstated because many are separate legal entities that operate as one business.

“We submit that instead of utilizing apples-to-oranges comparisons, it would be more productive to focus on ways to improve the SEC's investment adviser examination program to achieve a higher level of investor protection,” Mr. Tittsworth wrote.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

How to redesign, rebrand and recast your practice

Redesigning and reshaping your practice is a tough pill to swallow for advisers. But what got you here won't get you there, says John Kozuch, a Chicago financial adviser.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

10 signs your client is cheating on you

Sure signs that clients may be on the way out the door.

Morgan Stanley sees slower fee-based asset flows on fiduciary rule delay

Flows to advisory accounts, while still higher than the start of 2016, dropped off more than 20% from Q2 and were the lowest in a year.

How adviser salaries stack up to other jobs

Median compensation hovers just under $100,000 on the low end and reaches nearly $300,000 for bosses.

Finra ranking brokers in effort to crack down on industry's bad apples

All 634.403 reps have been ranked based on factors such as prior regulatory disclosures, disciplinary actions and employment history.

How to save retirement planning from tax reform

Losing big deductions, even in lieu of a larger standard deduction, may cause taxes to rise in retirement.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print