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April 25, 2016 at 08:00 PM
In case you missed it, the Securities and Exchange Commission’s annual investment advisor compliance outreach summit, held in mid-April at the agency’s Washington headquarters, was chock full of vital information about what the securities regulator will be zeroing in on this year — particularly 12b-1 fees, succession planning and third-party advisor audits.
By year-end, the agency plans to launch a “Share Class Initiative” to examine advisors’ commissions in connection with recommending share classes that charge investors 12b-1 fees, and the agency is knee-deep in assessing the “scope” of potential third-party advisor audits, agency executives said.
Jane Jarcho, national director of investment advisor exams, who was also recently named deputy director of the agency’s Office of Compliance Inspections and Examinations, noted at the compliance summit the recent actions the agency took in this area. One was against three AIG affiliates — which agreed to pay $9.5 million to the SEC — for placing clients in share classes that charged fees for marketing and distribution even though the clients were eligible to buy shares in an institutional share class that did not charge 12b-1 fees.
“We will continue to look at this; this is a really important area,” Jarcho said.
Diane Blizzard, associate director of the SEC’s Division of Investment Management, said that the IM division is “still developing” a third-party advisor audit proposal, which would be designed to provide “additional touches” alongside SEC exams.
Such additional information about advisors’ businesses collected by third-party exams would help inform OCIE’s “risk-based” exam approach, she said, adding that IM is still assessing the “scope” of such exams, which “will drive the questions about cost, standards and SEC oversight” of the third-party audit process.
“There’s an awful lot to work out when it comes to this proposal,” Blizzard said.
Jarcho agreed that “a lot of thinking [about] getting the scope [of such audits] right is being put into this proposal; There’s a lot of discussion on what the scope should be.”
Jarcho added that while SEC Chairwoman Mary Jo White has stated that using third-party audits to boost the number of advisor exams is not her “first choice,” developing such a proposal is “a priority of White’s and a lot of effort is being placed on this” at the agency.
The Chairwoman Speaks
White noted in her remarks that while the agency has become “smarter” about exams by using “risk-based analytics and employing tools like targeted or limited-scope exams,” more is still needed.
The advisor population, White said, “continues to grow at a rapid rate and our objective is to expand our coverage to protect investors across the spectrum.”
She reiterated the recent decision by the agency to transition some staff examiners from the broker-dealer examination program to the investment advisor/investment company exam program, “with a goal of increasing overall staffing levels in the IA/IC examination program — between transitioning staff and new hires — by 20%.”
While “that will help,” White said, it “is not nearly enough.”
Marc Wyatt, head of OCIE, noted that the agency is trying to keep pace with the onslaught on new advisor registrants: 1,000 new advisors registered over the past two years.
