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SEC Chief: Advisor Exam Crunch Is a ‘Serious’ Investor Protection Issue

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Boosting the Securities and Exchange Commission’s fiscal 2016 budget by 15% is vital to helping the agency increase investment advisor exams, as the current level of examining 10% of advisors annually presents “a real investor protection issue of great concern,” the agency’s chairwoman, Mary Jo White, told lawmakers Tuesday.

President Barack Obama’s 2016 budget would fund the SEC at a level of $1.722 billion, 15% more than the agency’s fiscal 2015 budget of $1.5 billion.

From fiscal year 2001 to the start of this fiscal year, assets under management of SEC-registered investment advisors increased approximately 254% from $17.5 trillion to approximately $62 trillion, White said.

The boost in funding would allow the agency to hire an additional 431 staff in “critical, core areas,” White told members of the Senate Subcommittee on Financial Services and General Government Committee on Appropriations. The agency could reach 225 examiners total, with 180 devoted to investment advisor exams. Adding 180 examiners (once fully trained) would help the agency boost the advisor exam rate to approximately 14% per year. 

Having more resources for advisor exams “raises the entire bar of compliance and translates directly into investor protection or the lack thereof,” White told lawmakers. The boost in funding would allow the agency to “have the boots on the ground,” White said, adding that as “BDs migrate to the investment advisor area because we’re less present there because of resources, the investor protection issue is quite, quite serious.”

Sen. Jerry Moran, R-Kansas, asked White if the Department of Labor’s 75-day comment period on its redraft to amend the definition of fiduciary under the Employee Retirement Income Security Act was “appropriate.”  

White responded: “This [rule proposal] has been under study for a long time.”

As to the SEC, “the notice and comment period required by” the Administrative Procedures Act “is enormously useful,” she said, adding that “this is a particularly complicated area.”

White reiterated her previous comments that the SEC has been providing “technical assistance” to the DOL on its fiduciary rulemaking and again stated that the SEC and DOL are two separate agencies operating under different statutes. The SEC has assisted DOL as it relates to the “broker-dealer model,” White said, as well as the “possible impact” of a new fiduciary definition on lower-income individuals.

She added that the SEC is “proceeding” in its discussions of a uniform fiduciary standard under Section 913 of the Dodd-Frank Act, which “imposes certain parameters” on the SEC.

The DOL’s “authority” to amend the definition of fiduciary under ERISA “is not under [Section] 913,” White stated. “One thing that we will clearly continue to do,” White said, is look at “overlapping issues” regarding each rulemaking. David Tittsworth, the former president and CEO of the Investment Adviser Association in Washington, who will start his new position at Ropes & Gray on June 1, says that while the prospects for enacting a 2016 budget “appear to be likely, the real money will be in the various appropriations bills that the House and Senate will be considering.”

The 2016 presidential election, he added, “will certainly play a role in the appropriations debates,” with “attempts by both Republican and Democratic members to force the other side to cast difficult votes.” 

That said, however, Obama’s SEC budget request “is basically DOA,” Tittsworth says.

White’s testimony came the same day Pioneer Investments released results of a live webinar poll gauging advisors’ attitudes toward the DOL’s fiduciary redraft. When asked about the impact of the new rule proposal on their business, 38% of 875 advisors polled indicated that it would “hurt their business and negatively impact profitability,” the poll found, while 27% indicated that it would “help their business by leveling the playing field on retirement advice.”

Twenty-one percent indicated that the rules would be a nonevent for their business, and 14% were unsure of the impact.

In terms of the impact on investors, 42% of advisors polled said that the new rule would hurt investors by raising costs and limiting the availability of advice, while 32% said the DOL plan would “help investors, and that putting investors’ interests first would drive better outcomes.”

Eight percent indicated that the DOL plan would be a nonevent, and 18% were unsure of the impact on investors.

— Check out FINRA’s Ketchum Criticizes DOL Fiduciary Plan on ThinkAdvisor.