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SEC Officials Butt Heads Over Third-Party Advisor Audits

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Two Securities and Exchange Commission officials on Thursday disagreed over whether the shifting of examiners from broker-dealer to advisor exams could “give pause” to the agency moving ahead with a rule to require advisors receive a third-party audit.

“We are studying that right now,” David Grim, director of the agency’s Investment Management Division, said in response to the question posed by Karen Barr, president and CEO of the Investment Adviser Association, during the trade group’s annual compliance conference in Washington. “Of course we are studying” whether the shifting of examiners will be enough to boost the advisor exam rate. However, Grim added “that work continues” on a third-party audit rule for advisors.

Marc Wyatt, head of the SEC’s Office of Compliance Inspections and Examinations, countered, however, that “onboarding” of examiners at the SEC “takes some time,” and that shifting of examiners alone will not “get us there” in terms of achieving a significantly higher number of exams.

That’s why supplemental third-party advisor audits are a good idea, he said. Such audits, he added, can provide “additional information that can help us sharpen our risk-based focus.”

The SEC announced Tuesday that OCIE has created an Office of Risk and Strategy within the division, and has appointed Peter Driscoll to head the new office under the title of chief risk and strategy officer. Driscoll, OCIE’s former managing executive, said that the new risk office would advance OCIE’s development of “new tools and techniques that strengthen” OCIE’s risk analysis and surveillance.

Wyatt said that he also sees OCIE continuing to allocate more examiners to the advisory space. Considering “the risks we have in the marketplace, the best resources of allocation will be to the investment advisor/investment company space,” he said, adding that more and more advisors continue to register each year, with 1,000 new registrants in the IA/IC space registering in the last two years.

SEC Commissioner Kara Stein said during a Q&A with Barr at the IAA event that she “applauds” the recent redeployment by OCIE staff of BD examiners to IA exams, and agreed with Wyatt that “we have more and more people registering as investment advisors,” which is a “testament” to the industry, but the agency continues to “struggle to enhance and modernize [its] regulatory scheme, including the way that we regulate investment advisors.”

Stein stated that she hasn’t “taken any position” on the agency moving ahead with third-party advisor audits, adding that she would “look at” any proposal and use her “best judgement” on how to proceed.

“There are many, many questions” in this third-party advisor audit area, “like cost and who would do it, scope [of the exams], so many issues on the table,” Stein said. “So I hope you’ll engage with us. Want to hear your thoughts on how to better regulate you.”

Neil Simon, IAA’s vice president of government affairs, noted that the SEC added 70 examiners and examined 10% of advisors in 2015, which represented 30% of advisors’ aggregate assets under management. The 10% of firms examined were selected based on risk.

The agency will devote an additional 100 examiners in 2016—shifting 70 from broker-dealer to advisor exams and hiring another 30.

Another 102 examiners would be added under President Obama’s proposed 2017 budget request.

“We are seeing a significant allocation to advisor exams, so we could get to 14% of advisors examined” annually, Simon said, which “argues for being cautious on third-party reviews.”

– Related on ThinkAdvisor: Why SEC Fiduciary Rule May Be ‘Unattainable’.