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- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
The much-anticipated “Study on Enhancing Investment Advisor Examinations” came floating down from the SEC Wednesday night. For those who want to stay informed about the future of regulation and oversight for the advisory profession, it is worth reading the 40-page document.
The premise of the report is that the number of investment advisors outweighs the SEC’s resources to conduct appropriate oversight (inspection and enforcement) activities. It finds that the number of SEC-registered advisors will fall by more than 28% later this year (mainly due to the shift of advisors that manage less than $100 million in assets to the states). But it estimates that the reduction will be short-lived. Assuming 5% annual growth (based on historical growth between 1980 and 1996), the total number of SEC-registered advisors will be back to 10,897 in five years. Meanwhile, the number of SEC examiners dedicated to investment advisors – currently 460 – is not likely to keep pace with the continued industry growth.
The report suggests three potential options that Congress should consider to deal with the SEC’s “significant capacity challenges”: (1) authorize the SEC to impose user fees on SEC-registered investment advisors to fund their examinations by OCIE; (2) authorize one or more self-regulatory organizations (SROs) to examine, subject to SEC oversight, all SEC-registered investment advisors; or (3) authorize FINRA to examine dual registrants for compliance with the Advisers Act.
So what does this all mean?
The report lays the groundwork for congressional deliberations on these important issues in the coming weeks and months. It is probable that the House or the Senate may hold hearings on the report. But the timing of any such hearings is impossible to predict. Both the House and the Senate are just getting organized and both have many more important priorities on their plates. Of course, the House is now controlled by the Republicans. Rep. Spencer Bachus (R-Ala.) replaces Barney Frank (D-Mass.) as the chairman of the House Financial Services Committee.
In 2009, Bachus inserted an amendment during committee deliberations that would have extended FINRA’s jurisdiction to any investment advisor that is affiliated with a broker-dealer (the provision was deleted during consideration of the legislation by the full House). If Chairman Bachus has not changed his views, it is likely he will support the third option set forth in the SEC report. Rep. Scott Garrett (R-N.J.) will also be an important player on these issues. As the chairman of the Capital Markets Subcommittee, he would likely preside over any hearings on these topics.
My reading of the report is that it makes a pretty strong case for the user fee option. Whether or not Congress will warm to the user fee idea is unknown. The House version of the Dodd-Frank bill included a provision authorizing the SEC to impose user fees on investment advisors but there was never any meaningful discussion of the provision and it was knocked out of the final bill during the House-Senate conference last summer.
Whatever happens, I expect FINRA and its allies to continue to push to extend its jurisdiction to some or all investment advisors. SEC Commissioner Elisse Walter, a former FINRA executive, filed a separate letter expressing her disappointment that the SRO option was not cited more favorably in the report. SEC Chairman Mary Schapiro, who recused herself from the SEC report due to her former employment as head of FINRA, is likely to participate in further discussions when her two-year recusal period ends.
It should be an interesting year…I welcome your thoughts and reactions to this important report.