Increasing coverage of investment advisers by a reorganized Securities and Exchange Commission examination staff and resistance from its current Republican member may keep on the shelf a proposal to allow private firms and non-governmental organizations to conduct adviser exams.
Before she departed in January, former SEC Chairwoman Mary Jo White said that she had drafted a regulation that would outsource some exams to third parties. But in recent public appearances, leaders of the agency's Office of Compliance Inspections and Examinations have touted the gains achieved by adjustments to the exam staff over the last two years.
In 2015, OCIE added about 70 new adviser examiners. Last year, about 100 examiners moved over to the adviser side from the broker-dealer side of the division. Now, about 600 of OCIE's 1,000 examiners are dedicated to adviser reviews.
"We're really seeing the bang for our buck this year in terms of execution," Peter Driscoll, acting OCIE director said on Thursday at an Investment Adviser Association compliance conference in Washington. "We're up 28% [on adviser exams] over last year at this point."
The agency has been under pressure for years to increase its adviser coverage. In 2016, it examined about 11% of the more than 12,000 registered investment advisers.
One idea to boost the numbers is to outsource some of the examination work to third parties. But Ms. White's proposal is stuck because neither of the two commissioners currently serving on the normally five-person panel backs it.
Acting SEC Chairman Michael Piwowar said that even with the outsourcing, the SEC would still have to oversee the outside examiners. Besides, it's a function that's best left in-house, he asserted.
"It's not a free lunch," Mr. Piwowar, a Republican, said at the IAA conference. "I prefer our own employees to do more difficult things [such as exams]. That allows them to see trends in the industry."
His words were welcomed by opponents of the third-party exam idea.
"It appears to me that the SEC is going to give the reorganization a chance," said Karen Barr, IAA president and chief executive. "It's likely that the SEC will see how that is progressing before it turns to the third-party concept."
The SEC may have missed its chance to push through third-party exams following scandals several years ago involving Bernie Madoff and other financial advisers, said Tyler Gellasch, owner of Myrtle Makena, a financial services consulting firm.
"As the big scandals of a few years ago fade into the distance, the window of opportunity for regulators to impose an unquestionably expensive and burdensome new regime is starting to close as well," said Mr. Gellasch, former counsel to one of the other current SEC commissioners, Democrat Kara Stein.
The political atmosphere also may work against the third-party rule, said Amy Lynch, president of FrontLine Compliance. Among his executive orders on de-regulation, President Donald J. Trump has called for agencies to eliminate two regulations for each new one they propose.
Although the SEC is not bound by the order because it's an independent agency, it is still likely to pay attention to the White House under a Republican majority led by Jay Clayton, Mr. Trump's nominee for SEC chairman.
"That [executive order] could be a problem for any proposal that has not been released before the two-for-one order," Ms. Lynch said.
There's also uncertainty surrounding Mr. Clayton's agenda and the views of the two additional SEC members that Mr. Trump must nominate.
"It's not a front-burner issue right now," said David Tittsworth, counsel at Ropes & Gray. "It's going to be a while before we have any idea where [Mr. Clayton's] going."
In the meantime, the SEC will continue to try to boost its exam numbers.
The 28% increase over the last year was "a significant bump," Mr. Tittsworth said. "It's certainly heading in the right direction. That's very encouraging."