FINRA Lawyer Blog
According to former Securities and Exchange Commission Chair Mary Jo White, the SEC insufficient examination of registered investment advisors is a “disaster waiting to happen.”
Without adequate oversight, misconduct at small advisory firms could be building up for years. While FINRA and state regulators vet half of all registered broker-dealers annually, the SEC only manages to examine 12% of RIAs every year.
Speaking at the Practicing Law Institute in New York, White expressed her concern about the SEC’s failing oversight of the independent space. “It’s a real problem that keeps me up at night,” she commented.
During her keynote speech, the former SEC Chair also referred to how dwindling budgets impact the agency: “The greatest impact on enforcement of the securities laws will be brought about by budget cuts [at the SEC and the Justice Department].”
The White House is currently proposing a 4% cut to the Department of Justice’s budget.
White, who served as Chair of the SEC during Obama’s second term, said that in spite of budget constraints, her staff had prepared a proposal to hire an independent third party with enough resources to vet RIAs. White’s successor, Jay Clayton, has completely disregarded the plan.
The abandoned proposal did not involve FINRA, an entity that has been looking to expand its authority to the independent space. For Clayton, White’s plan is “not a bad idea, but it’s not front of my mind right now.” A couple of months ago, Clayton said in a speech that he could bring the RIAs annual examination rate to 15%. In spite of the meager progress this would represent, he appeared to be satisfied: “I’m comfortable we’re making progress in that space.”
With this slow progress, it is easy to presume that some brokers may be choosing the path of the RIA simply to benefit from its lax regulatory environment. Naturally, this is bad news for investors.
As FINRA executive Susan Axelrod recently put it during a conference,“Why would you want to be examined frequently and have personal activity questionnaires [from FINRA] when you can sit back for 10 years [without being examined]?”
The RIAs under the SEC’s jurisdiction are indeed examined once per decade on average, while broker-dealers regulated by FINRA are examined at least once every two years.
In her speech, White said she viewed Clayton’s reform initiatives positively. The design of a uniform fiduciary standard for brokers and FAs appears to be a concern shared by both.
In this respect, perhaps Clayton will succeed where White failed. “I’m very pleased to see Chairman Clayton embracing this, and I know that he appreciates the difficulties. He is soliciting fresh comment and really wrestling with how to do that,” White concluded.