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Regulation and Compliance > Federal Regulation > SEC

Congress’ Call for SEC to Shift Resources: Dangerous Gambit

By Bob Clark

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Several lifetimes ago, when I was an editor at Financial Planning magazine back in the ‘80s, we had a problem: advertising sales for the June issue had been falling year after year, to the point that it was hardly worth putting out a magazine.

So the publisher, Herky Harris, and the editor-in-chief, Jack Lange, got together and created an annual Broker-Dealer Survey, which would run every June. Ad sales in that issue increased dramatically—within three years, we sold more ads in June than any other issue, except the IAFP (now the FPA) annual convention issue in October.

After another couple of years, not long after I became editor-in-chief, the new publisher (who shall remain nameless) came to me, bemoaning the fact that ad sales for January were the weakest of any issues. His solution: that we move the BD Survey to that issue, to boost sales, as the ad sales in June were so robust. It was one of the few times in my life when I was literally speechless. 

I had a flashback to that meeting as I was recently reading Melanie Waddell’s December 18, 2014 story: “SEC Chief White Pushes Back on Advisor Audits.”

It seems that rather than increasing the SEC’s budget so that it can conduct more RIA exams each year, two leading Congressmen have suggested to Chairman Mary Jo White that the Commission simply reallocate its current resources to get the job done. Apparently, the implication is that the SEC has got all its other areas of responsibility so well under control—capital markets, insider trading, accounting fraud, program trading, monitoring FINRA, criminal prosecutions, corporate filings, complying with all its “new” Dodd-Frank directives, etc., etc.—that it ought to cut back in all these areas to keep a better eye on those rascally RIAs.

The luminaries in question are chairman of the House Financial Services Committee Jeb Hensarling (R-Texas), and chairman of that committees’ Capital Market’s subcommittee, Scott Garrett (R-New Jersey). Back in November, these two Congressmen told Chairman White “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.”

The logic here boggles the mind, and comes close to once again rendering me mute. But I’ll try to soldier on.

My first brain cramp comes from the fact that we’re even having this discussion. Yes, it’s true that many RIAs, particularly the smaller firms, don’t get audited very often. So what? And, yes, in rare instances, some RIAs do violate their clients’ trust for their own financial gain.

Yet the poster boy for RIA audit reform has been Bernie Maddoff, who did run an RIA firm—in addition to a massive brokerage clearing firm, and serving as an officer on various NASD/FINRA committees. He’s about as much like an independent RIA as Fidelity Investments, or BofA Merrill Lynch (yes, they both have RIA firms, too). More important, the SEC audited Bernie Maddoff’s firms some eight times in the years leading up his demise. What did those exams uncover? Zip, nada, zilch, bupkis. It wasn’t until his Ponzi scheme collapsed under its own weight that the SEC stepped in to “save investors.”

That’s the real lesson here. Every year, we hear about one or two “real” RIAs who have bilked their clients out of their money. Yet I don’t remember hearing that even one of those cases came to light during a regular SEC audit. Rather, the Commission steps in after investors/clients complain about losing money. To its credit, the SEC often does get some of that money back—but again, not due to a regular audit.

To her credit, as Melanie reported, Chairman White is largely resisting the Congressmen’s suggestions, pointing out that the SEC has already reallocated resources to increase RIA audits “about 20%,” but further stating that “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.”

No kidding. With most brokerage firms owning an RIA these days, and FINRA’s enforcement actions against brokers historically way higher (on an actual and a percentage basis) than any actions against independent RIAs, reducing those resources would quite possibly lead to the next “crisis” in which Congress would be demanding the SEC to reallocate resources to solve the problem with out-of-control brokerage firms.

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