HOT DOG! ENHANCED EXAMS

Seems like there are lots of shoes to drop. I’ve been anxiously awaiting the biggie of the group, namely the SEC report on the application of a fiduciary standard. It was scheduled out today so I had been saving the following note on the SEC Study on Enhancing Investment Advisor Examinations (issued Wednesday) to cover both at once. Unfortunately it seems that the SEC will delay until at least Monday the fiduciary release so I thought I’d share some thoughts on the Advisor Exam issue in the interim.

The summary below is by John Baker of the law firm Stradley Ronon Stevens & Young, LLP and was posted on Yahoo’s FundLaw message board. My friend Kate McBride, Editor in Chief of Wealth Manager introduced me to the summary and she said “John always has a good analysis.” As Kate always provides nothing but thoughtful, substantive commentary I thought I’d pass this on.

“The Securities and Exchange Commission today released its staff study reviewing and analyzing the need for enhanced examination and enforcement resources for investment advisers, as required by the Dodd-Frank Act. Study on Enhancing Investment Adviser Examinations (Jan. 2011). The study reports that the staff believes that the SEC likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency. It argues that the SEC’s examination program requires a source of funding that is adequate to permit the SEC to meet the new challenges it faces and sufficiently stable to prevent adviser examination resources from periodically being outstripped by growth in the number of registered investment advisers (i.e., it requires resources that are scalable to any future increase – or, for that matter, decrease – in the number of registered investment advisers). The study recommends that Congress consider the following three approaches to strengthen the SEC’s investment adviser examination program:
(1) Authorize the SEC to impose user fees on SEC-registered investment advisers to fund their examinations by the SEC;
(2) Authorize one or more self-regulatory organizations to examine, subject to SEC oversight, all SEC-registered investment advisers; or
(3) Authorize FINRA to examine dual registrants for compliance with the Investment Advisers Act of 1940.

Commissioner Elisse Walter issued a separate statement with her own views. She emphasized that the current resource problem is severe, that the problem will only be worse in the future, and that a solution is needed now. She argued that the study overstates the benefits of the user fee option and understates the benefits of the SRO option, which she supports. She did not believe, however, that there has to be a single SRO or that it has to be FINRA.”

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