SEC fiduciary push gives momentum to third-party exams

But like with fiduciary, two sides are forming with opposing views on costs and standards for outside examiners

Mar 18, 2015 @ 1:55 pm

By Mark Schoeff Jr.

When Securities and Exchange Commission Chairwoman Mary Jo White endorsed a rule to raise investment advice standards for brokers, she also jump-started a controversial idea for expanding the agency's coverage of investment advisers — farming out exams to the private sector.

As part of rulemaking for a uniform fiduciary duty standard for retail investment advice, Ms. White said Tuesday the SEC also should implement a program of third-party compliance exams of advisers.

The move would be designed to help the agency's Office of Compliance Inspections and Examinations increase its oversight of advisers. Currently, the SEC examines annually about 10% of the approximately 11,500 registered investment advisers.

For years, the agency has requested significant budget increases to hire more adviser examiners, but congressional appropriations have fallen far short.

“It's beyond time to act in this space,” Ms. White said at a Securities Industry and Financial Markets Association conference in Phoenix. The goal of using outside examiners is “not to supplant, by the way, the OCIE work at all, but really as a supplement.”

On the sidelines of an Investment Company Institute conference in Palm Desert, Calif., on Wednesday, OCIE Director Drew Bowden declined to comment on the idea.

“That's being handled by the chair and the policy divisions,” Mr. Bowden said.

Commissioner Daniel Gallagher Jr. has been a vocal proponent of third-party exams but advisers are mixed on the idea. Many worry that the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, could become the third-party examiner.

The Investment Adviser Association has expressed misgivings about accountability of third parties, the costs associated with hiring them, SEC oversight of the outside examiners, and the quality and scope of exams.

“We have many serious concerns about the SEC's possibly outsourcing exams to third parties,” said Neil Simon, IAA vice president for government relations. “It is critical that the SEC's primacy be maintained in all areas of investment adviser regulation.”

But the head of a firm that could potentially conduct investment-adviser examinations is a fan of the idea.

“It's not politically feasible for the SEC to add the resources they need to add [for more exams],” Todd Cipperman, principal at Cipperman Compliance Services, said on the sidelines of the ICI conference. “The time has come. I applaud [Ms. White] for recognizing that, and understand that she can partner with the private sector to accomplish their ends.”

Without knowing the scope of the outside exams, it's hard to estimate costs. But Mr. Cipperman said advisers would be able to shop around for their examiners.

“Each firm can select the best resource for them and not be chained to a particular model,” Mr. Cipperman said.

Ms. White acknowledged that establishing third-party exams would present challenges, such as determining who should do them and setting standards for the reviews.

“This is not an easy road, not a quick road,” Ms. White said, referring to third-party exams and a fiduciary-duty rule.

Mr. Cipperman suggested the agency has a model for third-party adviser exams — outside audits of financial statements.

“It behooves them to set standards for third-party compliance reviews just like we have for financial-statement reviews,” Mr. Cipperman said.


Should the SEC use third-party firms for investment adviser exams?

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