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SEC gets staff recommendation to allow third-party exams

Securities and Exchange Commission Chairwoman Mary Jo White said Tuesday the agency has progressed in its consideration of a rule to allow third-party examinations of investment advisers.

“The staff has completed their recommendation [to allow third-party exams]: a proposal which is now with my fellow commissioners,” Ms. White said at the Securities Industry and Financial Markets Association annual conference in Washington.

She told reporters on the sidelines of the SIFMA conference that the commissioners could vote on whether to propose the recommended independent compliance reviews, but did not describe the details of the recommendation.

It’s not clear when the SEC, which currently has only three of its usual complement of five members, would act.

“I can’t predict the timing,” Ms. White told reporters.

The SEC has been under pressure to strengthen its oversight of advisers. The agency examines annually about 10% of the approximately 11,800 registered advisers. The SEC would like to increase the coverage rate to about 50%, and farming out some exams to nongovernmental third parties is seen as one way to help the agency boost its own effort.

“That would certainly be my goal,” Ms. White said of the 50% annual examination rate. “That’s going to take significantly more resources.”

In its annual budget requests to Congress, the agency has made adviser exams a top priority for increased funding.

Earlier this year, the SEC announced it would increase the number of investment adviser examiners by almost 20% — from 530 to 630 — by shifting broker-dealer exam staff to the investment adviser side of the Office of Inspections Compliance and Examinations.

The agency also has done “targeted hiring” in the adviser exam area, Ms. White said Tuesday.

With the shift of resources at the SEC toward adviser exams, the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, is taking on even more responsibility for oversight of brokers. Finra examines annually about half of the approximately 4,000 brokerage firms registered with the organization.

The SEC approves Finra rules and is now keeping a closer eye on the regulator’s operations through its recently established Finra and Securities Industry Oversight office.

Ms. White said the new office, housed within the SEC, is not necessarily pressing Finra for specific reforms.

“It’s a good move to make, given the importance of Finra and given our scarce resources,” Ms. White said.

During her SIFMA appearance, Ms. White also addressed whether the SEC would offer its own rule to raise investment advice standards, now that a similar rule from the Labor Department for retirement accounts will be implemented next year.


The Dodd-Frank financial reform law gave the SEC the authority to propose its own rule, but the agency has not acted on the controversial topic.

Ms. White reiterated that the SEC staff has completed “a detailed outline of how they would go about” proposing a fiduciary duty rule, which has been circulated to the three SEC commissioners. As she always does, she cautioned that a vote on a proposal won’t occur “any time soon.”’

“It needs to be a data-driven exercise so we get it just right so that we achieve the objective … of [raising] the bar of all financial professionals without essentially depriving retail investors of reasonably priced, reliable advice,” Ms. White said. “Getting that balance right is not easy.”

Two nominees to fill the SEC vacancies — Republican Hester Peirce and Democrat Lisa Fairfax — are awaiting Senate confirmation.