More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
The switching of advisors from SEC to state oversight under the Dodd-Frank Act is not “the final answer” to ensuring advisors are adequately examined, SEC Commissioner Elisse Walter told state securities regulators on Tuesday.
While it’s been nearly a year since Dodd-Frank required that advisors with assets of between $25 million and $100 million under management switch to state oversight in an effort to ensure more advisors get examined, Walter (right) said at the North American Securities Administrators Association’s annual public policy conference in Washington that “unless significant changes are made, the SEC cannot fulfill its examination mandate with respect to advisors.”
Despite the fact that the number of advisors examined by the SEC dropped after the switch, the former chairwoman said, by just over 8%, from 11,600 to 10,600, the “general complexity, and assets under management of the advisors for which [the SEC is] responsible actually increased by 22%, from $44 trillion to nearly $54 trillion.”
In the advisor exam area, she continued, “those challenges have been magnified by our new private fund adviser oversight responsibilities.” SEC staff, she said, estimates that, due to Dodd-Frank, the number of advisors to private funds registered with the commission will increase from 23% of all advisors to 38%.
Said Walter to state securities regulators: “We all must face the reality that, without future action to address our joint resource constraints in the advisory area, there simply are not enough examiners to go around.”
Such action, which she said needed to be “pursued now” by lawmakers, is one of the three solutions laid out in the SEC’s 2011 staff report to Congress, which called for the agency to either impose user fees to boost advisor exams, appoint a self-regulatory organization such as FINRA to oversee advisors, or provide a “substantial increase” to the SEC’s budget.
However, all three of those options require action by Congress, and industry officials, including FINRA CEO Richard Ketchum, say there’s little to no support in Congress to pursue user fees or SRO legislation, at least in the short term. As Ketchum told AdvisorOne in a mid-April email exchange: “Given the lack of consensus on the Hill” regarding an SRO for advisors, FINRA “is not pursuing legislation in either the House or Senate at this time.”
While Ketchum says he would support allowing the SEC to assess user fees to boost advisor exams “if it becomes an achievable solution,” he told AdvisorOne that he didn’t see a consensus among lawmakers to move forward with that option, either.
Rep. Maxine Waters, D-Calif., ranking member on the House Financial Services Committee, is said to be planning to reintroduce her user fees bill, but that has yet to occur.
While Walter said in her speech that she wasn’t advocating for one option over another, she has voiced her public support previously for an SRO and told reporters after her remarks that any of the solutions are welcome. But deciding which method to employ to boost advisor exams “is such a controversial issue,” Walter told reporters. “All of the solutions are going to take time. You can’t solve this problem overnight.”
Walter added in her comments to reporters that the inability to adequately examine advisors was “the most pointed deficiency” at the SEC.
While President Barack Obama’s recent budget request would allow the SEC to hire an additional 250 examiners specifically for advisors, Walter told reporters that number wouldn’t be enough to sufficiently boost the number of advisor exams, which now stands at a paltry 8% per year.
But a solution to the advisor exam crisis will have to come without Walter at the agency. After her replacement is named, likely in the coming weeks, Walter told reporters that she’d like to retire.
Read SEC Would Use Obama Budget Boost for Advisor Exams on AdvisorOne.