RIA Compliance Blog
In December 2016, then acting Chairwoman of the Securities and Exchange Commission (“SEC”) Mary Jo White drafted a proposal that, if adopted, would enable third-parties, such as private sector organizations, to perform compliance exams of investment advisers. Chairwoman White drafted this proposal in order to “increase SEC oversight of the approximately 11,800 registered investment advisers.” In 2016, the SEC conducted evaluations of only 11% of all registered investment advisers.
However, Michael Piwowar, the current SEC Chairman, has expressed opposition to the proposal. Piwowar claims that allowing third parties to conduct investment adviser exams would not increase the SEC’s efficiency because the SEC would still be required to monitor the third parties that it hires to conduct the exams. He is also of the opinion that requiring SEC employees to conduct the exams would better enable the SEC to become aware of “trends in the industry.”
There is also some evidence that the SEC is becoming more efficient, which would decrease the need for third party investment adviser exams. For example, in 2015, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) hired 70 new examiners tasked with examining investment advisers. In 2016, around 100 examiners who had formerly been tasked with examining broker-dealers were tasked with examining investment advisers. It is not clear, however, whether hiring freezes and other moves toward deregulation by President Trump will allow those efficiencies to withstand.
OCIE is also considering alternative methods of conducting exams that could result in increased efficiency. As of now, OCIE examiners typically perform an exam by evaluating all of a firm’s parts in a comprehensive review. OCIE is considering adopting a strategy where its examiners would conduct shorter exams that place increased focus on “particular high-risk areas.”
New technology also has the potential to increase the efficiency of investment adviser exams. As of now, OCIE examiners have come to rely on automated data mining and analysis tools to navigate through information they receive from sources such as industry filings. They then use this information to discover the investment advisory firms that appear to be worthy of examination.
The current political climate may also prove to be an obstacle to the implementation of the proposal to make use of third party investment adviser examiners. Some have commented that an ideal time to implement Chairwoman White’s proposal would have been a few years ago, when some notorious financial scandals rocked the financial world. Commentators have also noted that as time passes, the opportunity to increase regulation as a result of these scandals seems less likely.
Evidence also shows that an emphasis on de-regulation has started to gain a foothold in the political world. For example, President Trump recently signed an executive order demanding that federal agencies who are implementing new regulations phase out two old regulations for every new one. As one can see, the delay in implementation of the proposal on third party investment adviser examiners is attributable to multiple factors.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.