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Industry Spotlight > Broker Dealers

SEC Chief White Pushes Back on Advisor Audits

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Securities and Exchange Commission Chairwoman Mary Jo White told lawmakers in a letter on Wednesday that while the agency is considering using third-party audits to boost investment advisor exams, reallocating agency resources from broker-dealer and private fund advisor exams to achieve this goal would “not be advisable.”

Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, and Rep. Scott Garrett, R-N.J., chairman of the committee’s Capital Markets Subcommittee, told White in late November that user-fees collected from advisors to fund their exams was too costly an option and that the agency should “immediately” reallocate resources and also consider third-party audits to increase the number of advisor exams.

But White responded in a Dec. 16 letter to Hensarling that the agency “continues to strive to find ways using existing resources to increase coverage of investment advisors without sacrificing quality or important coverage in other areas,” and that such reallocation efforts have already resulted in more advisor exams.

The number of advisor exams conducted in fiscal year 2014 jumped approximately 20% to 1,164 from 964 in fiscal year 2013, White said, “with staffing levels remaining relatively stable.”

In those two fiscal years, White continued, advisors examined by the agency’s Office of Compliance Inspections and Examinations managed approximately 25% and 30% respectively of the total assets under management by all registered investment advisors.

White noted that the average number of investment advisor exams per examiner in FY2013 was approximately 3.2 and for FY2014 was 3.9, with the typical investment advisor examiner performing an average of six to nine exams per fiscal year in FY2013 and FY2014.

Both Hensarling and Garrett had suggested that White push more broker-dealer exams onto the Financial Industry Regulatory Authority.

But White explained in her letter that over the past several years, examiners in the agency’s broker-dealer examination program have been deployed to conduct examinations of investment advisors and broker-dealers which are dually registered as investment advisors.

“While I have instructed the staff to continue exploring and developing this strategy as appropriate, a more significant reallocation of examination resources from coverage of broker-dealers to the investment advisor program would not be advisable given the demonstrated need to maintain existing coverage of broker-dealers.”

White said that she has asked SEC staff to evaluate the “third-party compliance review concept,” as such reviews could be used to “quickly identify areas that require attention,” permitting the agency to allocate exam “resources better and, as a result, to increase the frequency” of advisor exams.

However, such third-party audits have drawbacks, White continued. Investment advisors have raised concerns regarding the “costs of a third party review (particularly as it relates to small advisors),” she said, as well as “standards for or expertise of the reviewers, and potential conflicts of interest which may impact the quality of reviews.”

The agency has said that its $150 million budget boost under the recently approved CROmnibus spending bill would permit the agency to increase its exam coverage.

Karen Barr, president and CEO of the Investment Adviser Association in Washington, says that while IAA has expressed “concerns” about third-party audits, the recent budget boost is “a positive development,” and she remains “optimistic” that the SEC will be able to continue to boost the number of advisor exams.

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