SEC investor advocate opposes third-party adviser exams

Rick Fleming outlines a policy agenda for fiscal 2015 with adviser oversight a top priority

Jul 3, 2014 @ 12:01 am

By Mark Schoeff Jr.

The new Securities and Exchange Commission investor advocate, Rick Fleming, takes no prisoners in his determination — some say a futile effort — to get the agency to increase its oversight of investment advisers while keeping the function in-house.

In his first recommendation to Congress earlier this week, he urged lawmakers to provide the full SEC budget request of $1.7 billion for fiscal year 2015 so it could hire more adviser examiners. He also said they should authorize the agency to charge user fees to advisers to fund more exams.

In an interview Tuesday, Mr. Fleming said the SEC itself should continue to conduct examinations — with greater support from Congress — and not farm it out to third-party examiners, as suggested by SEC Commissioner Daniel Gallagher.

“I appreciate any idea that will provide additional protection for investors, but I do think that regulation is a legitimate function of government and it's really the government's job to be the regulator,” Mr. Fleming said. “I also think it would be more efficient — less costly — to have the SEC do it as opposed to establishing some third party to do investment adviser examinations.”

Other problems with independent examinations of advisers include determining how to certify the auditors and provide SEC oversight of them.

Mr. Fleming has not yet talked to Mr. Gallagher about the issue.

“I think his heart is in the right place,” Mr. Fleming said.

Appointed in February, Mr. Fleming, a former Kansas securities regulator, is situated in a corner office on the third floor of the SEC headquarters building on Capitol Hill in Washington. His position was created by the Dodd-Frank financial reform law.

He eventually will have a staff of five to work with. So far, three of the positions have been filled — he's still seeking an ombudsman and an economist.

The office must submit two reports to Congress each year – one in June and one in December. Neither is reviewed by SEC staff. Mr. Fleming reports to SEC Chairman Mary Jo White. He also provides support to the Investor Advisory Committee, a body also created by Dodd-Frank.

Mr. Fleming spoke with InvestmentNews on Tuesday about, among other things, his first report to Congress. In that report he outlined a policy agenda for fiscal 2015 that includes equity market structure, investor flight from financial markets, municipal market reform, cybersecurity, corporate disclosure and elder abuse.

IN: Congress has consistently denied SEC its full budget requests? Will you have any more luck than Mary Jo White?

Fleming: I don't know that I'll have any more luck, but I do have 'advocate' in my title, and I intend to do that. The Senate looks a little bit more favorably disposed to the budget request. Based on my experience, anything can happen in a conference committee.

IN: Why isn't a uniform fiduciary standard for retail investment advice on your agenda?

Fleming: I didn't put that on my agenda mostly because I had to draw lines somewhere. It's not that I'm not interested in that issue. It's not that I don't think there's a problem of investor confusion. It's not that fiduciary duty isn't important. The other areas I've identified are important, as well, and will give us plenty to do over the next year. That was one of those areas where I'm basically going to shine a spotlight on what the Investor Advisory Committee has recommended.

IN: Why did you make increased adviser oversight your first recommendation?

Fleming: I didn't feel like it was an issue that required a lot of additional study on my part. I came into this job knowing something about that issue and having a strong opinion about it.

IN: How are you going to pursue your policy agenda? Are you going to draft rules?

Fleming: No. What we envision when it comes to a commission rule making is that hopefully somebody on my team will be involved in the formulative stages of the rule making, as ideas are being tossed around, and will be able to point out potential impacts on investors and what might be good for investors.

IN: Why is your office important?

Fleming: The [financial] industry, they're in here [at the SEC] all the time. They have plenty of resources to get their point across. The idea of this office is to make sure the voices of investors are also heard as decisions are being made.

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