Lack of adviser oversight is ticking bomb

Jun 22, 2014 @ 12:01 am

+ Zoom

The Securities and Exchange Commission took a hit last week when a House panel denied the agency the funding it says it needs to hire additional investment-adviser examiners.

In a voice vote, the House Appropriations Subcommittee on Financial Services and General Government approved a measure that sets the SEC budget at $1.4 billion for fiscal 2015 — a $50 million increase to its current budget, but $300 million less than the Obama administration requested.

The SEC funding was part of an overall bill that totaled $21.3 billion and covered several agencies, including the Internal Revenue Service and the Consumer Financial Protection Bureau.

On one hand, Congress' decision to keep a lid on budget increases should be applauded. Indeed, it reflects a measure of level-headed moderation and — dare we say — austerity in Congress that we have not seen for a long time. On the other hand, it perpetuates the SEC's longstanding frustration over a persistent lack of funding which, it says, is hampering its ability to properly oversee the 11,000 registered investment advisers under its charge.

In congressional appearances earlier this year, SEC Chairman Mary Jo White argued for the SEC's full $1.7 billion request, saying it needed the funding in part to hire an additional 316 examiners for the Office of Compliance Inspections and Examinations. About 240 of the new hires would be investment adviser examiners, according to the agency.

The agency, by its own admission, annually examines only about 9% of those roughly 11,000 RIAs it's charged with overseeing, or less than 1,000.

NO EXCUSE

Despite the relatively meager increase in funding for fiscal 2015, the SEC must not use a lack of financial resources as an excuse for letting investment adviser oversight fall by the wayside. Like companies and individuals must do in times of belt tightening, the commission must find a way to fulfill its mandate of protecting investors from unscrupulous advisers and planners.

The state of investment adviser oversight in the U.S. is appalling, and the financial security of millions of Americans is put in harm's way because of it. 

In addition to checking only on that roughly 9% of RIAs a year, the SEC has said that 40% of advisers have never been examined.

Those rates are simply unacceptable.

In light of Congress' move last week, other ideas must be considered.

One, of course, is for the commission to simply reallocate its existing resources. The chief advantage of that approach is that it would allow the commission to bolster its exam schedule immediately without additional legislation or rule making.

Another is to move forward with pending legislation introduced by Rep. Maxine Waters. The bill, known as the Investment Adviser Examination Improvement Act of 2013, would authorize the SEC to collect user fees from investment advisers to improve examination frequency. Unfortunately, the bill has attracted only six Democratic co-sponsors while committee Republicans re-main steadfast against it.

A third idea, and the one that seems the most feasible, comes from SEC member Daniel Gallagher. In recent speeches and public appearances, he has recommended that 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 mandating that advisers who maintain custody of client assets bring in an auditor to verify that the funds are safe.

While Mr. Gallagher's proposal is worthy of serious consideration, much would have to be worked out — not the least of which is the cost to advisers and the qualifications of would-be examiners. Nevertheless, Mr. Gallagher's proposal could be implemented relatively quickly and would not require the SEC to cut back on other parts of its operation.

No matter what, the SEC must find a way to increase its schedule of investment adviser examinations. The situation, as it stands, is a ticking time bomb and American investors are the ones who will be hurt when it goes boom.

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