Hopes fade for RIA third-party exam rule by the SEC this year

Chairwoman Mary Jo White said a proposal for such exams has been circulated, but two other commissioners may be reluctant to act. (More: SEC sets record in enforcement actions against investment advisers)

Hope is fading for the Securities and Exchange Commission to act this year on a regulation that would authorize independent examinations of registered investment advisers.
In an appearance at an industry conference in September, SEC Chairwoman Mary Jo White said a proposal for so-called third-party exams had been circulated to the other two SEC members, Democrat Kara Stein and Republican Michael Piwowar.
But in an Oct. 13 SEC open meeting, Mr. Piwowar said he would not support any new SEC rulemaking until the panel voted on a rule that would facilitate online delivery of mutual fund shareholder reports.
He outlined four measures that were already in the pipeline for a vote — third-party exams not among them — and then drew the line there.
“I commit to neither calling for, nor working on, any non-emergency rule-makings beyond the four I just mentioned until we vote on the [electronic delivery] rule,” Mr. Piwowar said.
Since then, the agency has acted on two other matters, but he hasn’t rescinded his threat.
Duane Thompson, senior policy analyst at Fi360, a fiduciary training firm, said third-party exams likely have met the same fate as an SEC rule to raise retail investment-advice standards.
Both are complicated, controversial measures that are difficult to advance on a commission that is operating with only three of its five members.
“The third-party exam and the fiduciary rule are both symptomatic of that gridlock,” Mr. Thompson said. “It looks like we’re not going to see much come out of the commission until a new president is in office, we get a new chairman and the vacancies are filled.”
Skip Schweiss, managing director of advisor advocacy at TD Ameritrade Institutional, has been a proponent of third-party exams as a way for the SEC to close the exam-coverage gap for advisers. But he said the latest developments are not promising.
“Every idea that is put forward, somebody has criticism for or opposition to,” Mr. Schweiss said. “It would appear on the surface that it’s in jeopardy of not going anywhere.”
On Tuesday, the Wall St. Journal reported that the third-party exam rule is “stalled” and that Mr. Piwowar and Ms. Stein have concerns about its “costs and effectiveness,” according to anonymous sources.
It’s unclear when the regulatory gears will start grinding and any concerns could be addressed, because Mr. Piwowar is still waiting on the electronic-delivery rule.
“When you see a commissioner say this is something that goes to the front of the line, then other things have to fall behind,” Jeff Brown, Charles Schwab & Co. senior vice president and head of legislative and regulatory affairs, said in late October at the Schwab Impact conference in San Diego.
Counsels to Mr. Piwowar and Ms. Stein declined to comment.
Ms. White has said in congressional testimony that strengthening adviser regulation is an investor-protection priority. In recent years, the SEC has examined about 10% of the 11,800 registered investment advisers.
The SEC argues that the coverage rate doesn’t fully reflect its adviser oversight because it does a risk analysis of many firms before zeroing in on the ones it will examine.
Third-party exams are seen as a way for the SEC to multiply its exam capacity. But in drafting a rule, it would have to tackle difficult details, such as quality standards for private-sector examiners and the costs that would be incurred by advisers who would have to pay for their own reviews.
“There are still issues to be worked out,” Michael Townsend, Schwab’s vice president of legislative and regulatory affairs, said at the conference. “This is a long process.”