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SEC Ditches Plan for Third-Party Advisor Audits

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The Securities and Exchange Commission will not pursue a third-party audit rule for advisors, according to the agency’s regulatory agenda, released in late July.

David Grim, head of the agency’s Division of Investment Management, which was responsible for drafting the third-party audit rule designed to boost the number of advisor exams, said Thursday that he plans to leave his post in September after more than 20 years at the agency.

IM oversees the $70 trillion asset management industry, which includes mutual funds, exchange-traded funds, closed-end funds, variable insurance products, business development companies and investment advisors. 

Former SEC Chairwoman Mary Jo White told ThinkAdvisor before her departure in January that she’d hoped the next chair and commission would advance the third-party audit rule.

White said at the time that “a completed proposal” was before her two fellow commissioners. “I’ve stated this publicly: I think it’s very important to advance it.”

The controversial third-party advisor exam idea, which White called “independent compliance reviews” for advisors, was billed as complementing SEC exams, and designed to remedy the advisor exam shortfall. 

In 2016, under White’s leadership, the SEC reassigned approximately 100 examiners from broker-dealer exams to advisor exams.

SEC Chairman Jay Clayton told lawmakers in late June that his goal is to achieve a “further 5% increase in the number of investment advisor exams” in fiscal 2018.

Also dropped from the SEC’s plans according to its regulatory agenda are stress tests for larger advisors as well as target date fund disclosure updates.

Notable potential new rule additions include a rule on auditor independence with respect to loans or debtor-creditor relationships, which would amend Reg S-X, as well as a rule to require that the Investment Advisers Act conform to the Fixing America’s Surface Transportation Act, or FAST Act.

Rules that remain to be considered by the agency, some of which were advanced under Grim’s tenure, include a commission proposal of rules regarding funds’ use of derivatives; a variable annuity summary prospectus; business continuity and transition plans for investment advisors; as well as recommending that the Commission repropose new rules and rule amendments to provide exemptive relief for index-based and actively managed exchange-traded funds.

As to providing an exemptive rule for index-based ETFs, Norm Champ, former head of the IM division, who’s now a partner in the Investment Funds Group at Kirkland & Ellis, told ThinkAdvisor on Thursday that he’d  “love to see that happen.”

Champ also noted that he “commends the chairman and the [IM] Division for eliminating the third-party exams of investment advisors proposal from the Commission’s rulemaking agenda because of the difficulties in implementing such an exam requirement.”

While third-party audits were dropped off the reg agenda, so was a fiduciary rule, added Karen Barr, president and CEO of the Investment Adviser Association in Washington. “I would not take too much from the fact that [third-party audits] was dropped off.” That being said, it also “may well mean it’s not top of mind” at the Commission. IAA, which has opposed the third-party exam idea, has “long thought that investment advisor exams are a government function.”

The current commission as well, Barr said, would likely not support a third-party audit rule.

“We have noted with admiration that the SEC has increased examinations over the past year,” Barr said, adding that “great strides are being taken to improve” the advisor exam rate. 

Champ left as head of IM in January 2015. During his time at IM, Champ said that he “relied daily” on Grim’s “mastery of both the Investment Company and Investment Advisers acts and his superb judgment when we worked together leading the Division.”

Grim joined the SEC in 1995 as a staff attorney in the Division’s Office of Investment Company Regulation. In 1998, he moved to the Division’s Office of Chief Counsel, where he served in a number of positions, including being named assistant chief counsel in 2007. He was appointed as deputy director of the division in 2013, and director in 2015. 

Grim graduated cum laude with a degree in political science from Duke University and received his law degree from George Washington University, where he was managing editor of the George Washington Journal of International Law and Economics. 

— Check out Judge Hammers DOL on Fiduciary Rule’s BICE on ThinkAdvisor.


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