Rulebook

IAA To SEC: No Third-Party SRO Exams

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Advisor advocates are on the offensive after SEC Commissioner Dan Gallagher’s said the commission should look at the possibility of an SRO (self regulatory organization) to provide oversight of RIAs.

In a speech at the 6th Annual Rocky Mountain Securities Conference last month, Gallagher said he feared investment advisor fraud and securities violations were going undetected. He pointed to a report showing 20 percent of brokers had disclosure events on their record (including customer complaints, regulatory violations, terminations, bankruptcy, judgments, etc..).

“In reality, there are plenty of repeat offenders at investment advisory firms who are engaging in misconduct. We’re just not finding them as quickly because the SEC allocates a disproportionate amount of resources to policing the activities of broker-dealers when compared to those we expend policing investment advisers…Simply put, it is impossible to separate the fact that we find many more broker-dealer violations than investment advisor violations from the fact that thanks to the assistance of the SROs, we examine a greater proportion of broker-dealers than investment advisors. One way to address this imbalance would be to provide for third party examiners of investment advisors—including, potentially, defining the term “third party” to include SROs in order to allow the SROs currently involved in broker-dealer oversight to conduct examinations of “dual hatted” investment advisors as well.”

At FINRA’s annual conference, Gallagher again flagged the issue, saying the SEC should introduce regulation requiring independent, third-party examinations for investment advisors. It is not clear if he would advocate FINRA be the SRO responsible for investment advisors and RIAs.

The IAA, opposing any extension of FINRA oversight, said it was a mistake to think the SEC could not efficiently continue patrolling the ranks of RIAs, and likely overestimates how many fims it has to examine.

In a letter Thursday to the Republican commissioner, the Investment Advisor Association outlined the disadvantages to third-party examinations of investment advisors. Instead, the group said it wants a more open dialogue on "appropriate options to enhance investment advisor oversight."

“Before engaging in any rulemaking that would require SEC-registered advisory firms to undertake an examination or other review by a third party, it would be helpful to understand what practices are already undertaken, how such practices are utilized, the types of third parties retained, and the costs involved,” the letter says.

FINRA backed off from a concentrated push to control registered investment advisers last February after then Financial Services Committee Chairman Spencer Bachus (R., Ala.)  tabled his SRO bill. Successor Jeb Hensarling (R-Texas), has not made a similar push to shif responsibility for the advisors from the SEC to a self-regulatory organization.

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