It's an intriguing idea: Let RIAs hire their own examiners.
That's the thinking offered in a
study released yesterday by Georgetown professor James Angel.
Neither the SEC or states have enough resources to examine advisers, and letting the
Financial Industry Regulatory Authority Inc. take over would require passing controversial legislation, Mr. Angel said in an interview.
So his idea is to let advisory firms outsource routine exams to accounting firms, consultants, SROs or even other advisory shops.
Mr. Angel's study was sponsored by TD Ameritrade's RIA custody unit, so it's not going to be seen as a completely unbiased inquiry.
But Mr. Angel, a frequent commenter on regulatory matters, could be opening another line of attack for advisers who want to avoid regulation by Finra.
His paper essentially paints a fourth option to performing adviser exams, beyond the three options the SEC laid out in its own adviser-oversight
study (have advisers pay user fees; set up an SRO; have Finra take on hybrids).
Hiring outside auditors is the model corporate issuers follow, Mr. Angel argues, and the examination of a relatively small RIA shop is much simpler than poking into a public company. Most adviser exams are simply check-the-box routines, he said, as are Finra exams.
"I think for a three-guy shop that doesn't custody accounts, having an examiner check in every three years is probably enough," Mr. Angel said.
Outsourcing routine exams will free up SEC staff to do more important things, like for-cause examinations, Mr. Angel's study says.
He said the SEC has all the power it needs to implement his plan. No more funding is needed (advisers would pay), and no controversial SRO bill would have to move through Congress.
A key issue is what the qualifications should be for the firms and personnel that conduct the compliance reviews for advisers.
Setting qualifications would be up to the SEC, Mr. Angel said.
Mr. Angel's idea might sound good. Just keep in mind that it's bound to be opposed by the securities industry and Finra, who seem to be winning their share of political skirmishes in pushing for a self-regulatory organization for advisers.
"The idea of having private accounting firms, hired by [advisers] evaluate sales practices raises a number of questions, including such firms' lack of experience and expertise in conducting sales practice evaluations," said Finra spokesman Howard Schloss in a statement.
Finra believes supports having one or more SROs to take on adviser exams, he said.
Mr. Angel's idea is a "non-starter," said Financial Services Institute Inc. spokesman Chris Paulitz, in an email. "Bernie Madoff was subject to the supervision of an auditing firm he handpicked and we all know how effective that turned out to be."
The solution for adviser oversight "is a capable, competent regulator that is self-funded -- in short, Finra," Mr. Paulitz said.
The goal of a uniform fiduciary standard for brokers and advisers is best done with " uniform examination, oversight, and enforcement," said Ira Hammerman, general counsel of the Securities Industry and Financial Markets Association, via email.
"Using accounting or auditing firms to do the job simply would not offer the level of protection and oversight that retail investors deserve under a new uniform standard," he said.
