Views on improving the integrity of global capital markets
02 January 2018

No Third-Party Exams for Investment Advisers

Posted In: US SEC
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The recently-released Securities and Exchange Commission regulatory agendas have confirmed what has long been rumored—that the SEC does not intend to pursue the use of third-party examiners to conduct their investment adviser examinations.

As the number of registered investment advisers (RIAs) with the SEC has increased–approximately 12,000 at last count—the SEC has come under considerable criticism for its low percentage of examinations conducted each year, which has hovered around 10%. In contrast, for example, Financial Industry Regulatory Authority (FINRA) examines about 50% of the 3,800 of the broker-dealers registered with it.

As a result, consumer advocates and investor protection groups have floated the idea of using groups outside of the SEC (FINRA, for example) to share responsibility for conducting the RIA exams. Alternatively, there has been consideration of forming a separate securities regulatory organization specifically dedicated to the oversight of RIAs.

SEC Discounts Use of Third-Party Examiners

In a September 2017 speech, the acting head of the SEC’s Office of Compliance and Examinations (OCIE) defended the SEC’s current examination efforts.  Of the 2,400 examinations of regulated entities conducted in 2016, 1,450 were of RIAs—an increase of 20% over RIAs examined in 2015. Moreover, 20% more of OCIE’s examination staff has been deployed to conduct adviser examinations, using a risk-based approach that is intended to increase efficiency.

But it was SEC Chair Jay Clayton’s statement in late September that provided a clear indication that the SEC is moving away from a notion of using third-party examinations in overseeing RIAs. While he noted that the use of third parties is “not a bad idea,” he said that “it’s not in front of my mind right now.” In fact, he predicted that the SEC will achieve a 14-15% RIA examination rate this fiscal year and is “comfortable that we’re making progress in that space in terms of our coverage.”

Future Agenda Items

So, even with consideration of using third-party examination providers off the SEC’s current regulatory agenda, a variety of short and long-term agenda items are taking its place. Perhaps at the forefront of immediate consideration is proposing a standard of conduct for personalized advice—reflecting Chair Clayton’s stated desire to work with the Department of Labor to fashion a workable standard.  Also appearing on agendas is consideration of amendments to the Volcker Rule, clarification of what constitutes an “accredited investor,” and amendments to current crowdfunding rules. (See here for long-term and short-term regulatory agendas).  2017 may be easing out, but it looks like a busy future for the SEC in 2018 and beyond.

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Photo Credit: ©Getty Images/XtockImages

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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