SEC's White defends coverage of investment advisers

Chairwoman says agency is considering augmenting adviser exams with third-party audits

Dec 17, 2014 @ 4:40 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission is more effectively using its existing resources to increase examination coverage of investment advisers, Chairwoman Mary Jo White told congressional critics. But the agency is considering use of third-party auditors, she said.

In a Dec. 16 letter to Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, Ms. White rejected the suggestion that the agency shift examination funding for private funds and broker-dealers to investment adviser oversight.

Mr. Hensarling and Rep. Scott Garrett, R-N.J., recommended such an approach in a Nov. 24 letter to Ms. White. They said it was a better approach than asking Congress to increase the SEC's budget.

The SEC has redeployed broker-dealer examiners to conduct exams of broker-dealers who are dually registered as investment advisers, Ms. White said, but she doesn't plan to contemplate any more shuffling.

“While I have instructed staff to continue exploring and developing this strategy as appropriate, a more significant reallocation of examination resources from coverage of broker-dealers to the investment adviser program would not be advisable given the demonstrated need to maintain existing coverage of broker-dealers,” Ms. White wrote.

She said the SEC is considering augmenting adviser examinations by allowing third-party audits, although she noted concerns raised in comment letters in 2003 about the concept. Skeptics cited costs for advisers, standards for reviewers and potential conflicts of interest.

Investment advisers have resisted the notion of a third-party examiner, fearing that the job would fall to the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator.

“I have asked the staff to do a current evaluation of the third-party compliance review concept,” Ms. White wrote.

Congress recently approved an appropriations bill that boosted the SEC budget to $1.5 billion for fiscal 2015, an increase of $150 million. The agency said it would use part of the increase to fund the hiring of more investment-adviser examiners.

In her letter to Mr. Hensarling, Ms. White said the average number of adviser examinations per examiner rose to 3.9 in fiscal 2014 from 3.2 in fiscal 2013. The average examiner worked on six to nine exams per year each year.

The agency has recruited industry experts, strengthened examiner training and “enhanced its use of advanced quantitative techniques” to systematically review all registered investment advisers and target for on-site exams those who represent the highest risk, Ms. White said.

The efforts have boosted the agency's exam coverage — from 964 in fiscal 2013 to 1,164 in fiscal 2014 — without an increase in the Office of Compliance Inspections and Examinations staff. The SEC's exams covered approximately 30% of an estimated $55 trillion in assets under management in fiscal 2014.

“I'm pleased to see that the commission is making more effective and efficient use of its existing resources,” said Karen Barr, chief executive of the Investment Adviser Association. “The letter makes me more optimistic that the SEC is going to increase its coverage of investment advisers.”

But she doesn't want it to achieve those gains by approving third-party auditors.

“It could be a race to the bottom,” Ms. Barr said. “Fundamentally, we believe the SEC should be conducting exams.”


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