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Third-Party Advisor Audits Could Be a Disaster: Norm Champ

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The Securities and Exchange Commission’s plan to require advisors to get third-party audits will be costly for advisors and their clients and could have unintended consequences, says Norm Champ, the former head of the agency’s Division of Investment Management.  

In a Sunday op-ed in The Wall Street Journal, Champ, who’s now a lecturer on investment management law at Harvard Law School, said the SEC’s plan to boost the frequency of advisor exams by requiring advisors to pay for third-party examiners sounds “sensible,” but the “unintended consequences need to be examined.”

Champ notes the “disastrous results” when the agency turned over its “gatekeeper” powers involving credit rating agencies and proxy voting to third parties.

Before the agency moves ahead with a third-party exam rule, Champ says, it should “reallocate its own resources and improve its productivity,” namely by shifting some of the 200 examiners devoted to broker-dealer exams to advisor exams.

Putting the burden on advisors to receive a third-party exam “turns a blind eye to the SEC’s failure to use its own resources efficiently,” Champ says. “The SEC’s exam program has about 450 examiners for investment-management firms and completes about 1,100 exams a year. That is about two exams per person a year. Shouldn’t the SEC address its own productivity before it imposes a costly burden on advisors?”

The Financial Industry Regulatory Authority examines around 40% of all broker-dealer firms each year, Champ notes. “If the failure to examine enough investment managers is a critical problem, why doesn’t the SEC reassign its broker-dealer examiners to begin conducting examinations of investment managers?”

David Tittsworth, the former president and CEO of the Investment Adviser Association in Washington, told SEC Chairwoman Mary Jo White as well as the SEC commissioners in June that the SEC should reallocate existing resources in order to examine more advisors.

The SEC’s third-party audit exam would supplement current SEC exams but not replace them.

Meanwhile, the SEC told the Office of Management and Budget in its recently filed regulatory agenda that its uniform fiduciary rule for brokers and advisors — called the Personalized Investment Advice Standard of Conduct — is still a long way off, and won’t be ready until next October. 


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