TD Ameritrade, Schwab put third-party exams on lawmakers' radar

Without outright endorsing the idea, executives say outside contractors should be considered as a way to increase oversight of RIAs

Jun 13, 2014 @ 12:01 am

By Mark Schoeff Jr.

Congress doesn't have a direct role in determining whether the Securities and Exchange Commission will require investment advisers to use private-sector firms for compliance examinations, but industry officials are making sure lawmakers are aware of the idea.

During meetings with legislators and their staffs as part of the Investment Adviser Association's Lobbying Day on Capitol Hill on Thursday, executives from Charles Schwab & Co. Inc. and TD Ameritrade Institutional brought up third-party exams.

SEC Commissioner Daniel Gallagher floated the idea of third-party exams in public appearances last month. He proposed it as a way for the agency to increase coverage of the approximately 11,000 registered investment advisers at a time when the agency says it lacks the resources to examine more than about 9% annually.

Although there are potential drawbacks to such reviews, including costs and developing standards for the private examiners, it's an approach that should be considered, the industry leaders said.

“We would like to see the SEC retain both the rulemaking and the exam process,” said Bernie Clark, Schwab executive vice president for adviser services, between meetings on Capitol Hill. “Perhaps there's a third-party option that needs to be utilized. We would like to create options to solve the problem of frequency of exams.”

In the partisan atmosphere that permeates Capitol Hill, it's unlikely that the SEC will get the funding it seeks or that Congress will approve a bill sponsored by Rep. Maxine Waters, D-Calif., and ranking member of the House Financial Services Committee, that would allow the SEC to charge advisers user fees for exams.

“We think there ought to be an open and thorough discussion of [the third-party exam] approach,” said Jeff Brown, Schwab senior vice president and acting general counsel.

Skip Schweiss, managing director of adviser advocacy at TD Ameritrade Institutional, said he, too, wants third-party exams to be considered.

“It's something that ought to at least be entered into the discussion,” said Mr. Schweiss, who participated in the IAA Lobbying Day. “It's a concept that works well [for corporate accounting audits], and could it work as well to increase the frequency of exams for advisers?”

Lawmakers and their staff members expressed interest in the user fee and third-party approaches.

“The receptivity is there for both of these ideas,” Mr. Schweiss said.

In a letter to Mr. Gallagher earlier this week, the IAA expressed concerns about third-party exams, while saying that it was an idea worthy of discussion. It would prefer greater funding for the SEC Office of Compliance Inspections and Examinations, according to Neil Simon, IAA vice president for government relations.

“We want to talk about strengthening SEC oversight,” said Mr. Simon, whose group brought 30 advisers to Washington. “We think there are far better options [than third-party exams]. We want to staff up OCIE."

Third-party exams are not directly a legislative issue. The SEC has the authority to write a rule, according to Chairman Mary Jo White. But the SEC does listen to lawmakers.

“They could communicate to the SEC that they think this is a viable option,” Mr. Schweiss said.


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