The RIA exam equation

Imagine getting a $150 million windfall and complaining it's not enough. That is exactly what an official at the Securities and Exchange Commission did a few weeks ago, after the agency received an unexpected budget increase thanks to some last-minute finagling in Congress as it passed an appropriations bill. That pushed the regulator's annual budget to $1.5 billion — no small sum by any means, but apparently not enough for some. One of the most outspoken critics was Rick Fleming, the SEC's investor advocate. Some of the funds will go to increase exams of registered investment advisers, but Mr. Fleming argued that's insufficient to police the industry adequately. The SEC has been doing a better job, increasing the number of exams to 1,164 in the last fiscal year from 964 the year before, but with 11,000 RIAs, that's a drop in the bucket. Mr. Fleming is correct in that respect.

FINDING ANSWERS

But what is the answer? To triple the number of exams the SEC conducts annually (a reasonable number that even critics would agree with), it would need hundreds of millions of additional dollars to hire more examiners. Some, including Mr. Fleming and the Financial Planning Coalition, have said that RIAs should bear the brunt of exams through user fees. But those fees likely would be exorbitant and strain the budgets of smaller RIAs. Also, they probably would be passed on to consumers — hardly an incentive for more people to use financial advisers. Maybe the issue isn't who pays but how much gets done — a question of efficiency. Each trained and experienced examiner at the SEC now conducts fewer than five exams a year. That is unacceptable. In a letter to SEC Chairwoman Mary Jo White about increasing adviser exams, Rep. Jeb Hensarling, R-Texas, and Rep. Scott Garrett, R-N.J., suggested that the SEC consider creative solutions to the exam deficiency, including leveraging the resources and expertise of the private sector. That may or may not be the answer, but one thing is clear: It's time for the SEC to come up with a better mousetrap — in this case a more cost-effective way of examining advisers.