Focus Perspective: Examination Goals & More

Examination Goals

Fiscal year 2018 is over, and 2019 has begun. We don’t know if the SEC’s examination staff has met the goal of 2,120 examinations of registered investment advisers (“RIAs”) or not, roughly 15% of the number of SEC registered RIAs. Our experience has been that the first few weeks of the new fiscal year are spent writing up and closing examinations that were conducted in the prior fiscal year, so they can be counted towards the prior year’s goal.

We know that the estimated number of examinations for FY 2019 is 2,160, again roughly 15% of the estimated number of RIAs, understanding that more investment advisers register each year. The SEC has indicated in the past that the goal is to examine every RIA on a five-year cycle, but the problem is that risky advisers will be visited more often than that. Seventy-two percent of RIAs examined in FY 2017, had deficiencies. If an adviser was found to have serious and/or numerous deficiencies, and responded to the SEC that those deficiencies were corrected, do you think the SEC will want to wait five years to find out if those deficiencies were really corrected? Additionally, the number of registered advisers tends to grow every year, so that 15% of the estimated number of RIAs in FY 2018 is 2,120, while 15% in 2019 is an estimated 2,160, an additional 40 examinations. Then, there are cause exams, 177 in FY 2017, broker-dealer and investment adviser, which by their nature are not on the examination schedule, and most often are not on their five-year cycle. Even if only 50 of the cause exams are RIAs, that will push 50 scheduled RIA exams into the next year.

View Fiscal Year 2019 Congressional Budget Justification and Annual Performance Plan & Fiscal Year 2017 Annual Performance Report


SEC Responsibility for Retirement Assets

On October 16, Commissioner Kara M. Stein spoke at the Brookings Institution concerning retirement assets and those investing for retirement, and the need to protect those investors and their assets:

“There are many types of professionals offering investment advice and the rules that apply to them differ significantly. And that’s confusing. It’s confusing both for the investors and for the investment professionals. In fact, there is a substantial expectations gap. In a recent survey conducted by SEC staff, nearly 80% of respondents believed that investment professionals subject to a ‘best interest’ standard would take into account the investor’s ’personal financial situation.’ Nearly 70% believed that the professional would monitor the account on an ongoing basis. And, over half believed professionals would not sell products that would cause the investor to lose money. … ”

“Simply put, most investors assume that someone who is giving them advice has to put the investor’s interests first. This is, after all, what they are paying for. However, while sometimes this is true, frequently it is not. So how do we ensure that investor’s expectations meet reality? I see at least two ways of going about this. We can raise the duty for all investment professionals so that it meets investor expectations. Or, we can teach investors to treat the advice that they receive from certain professionals differently. After all, most consumers do not treat the advice they receive from doctors the same as the advice they receive from salespeople. However, educating investors about complicated legal duties is quite complicated in and of itself. It’s confusing for the investment professional and for the investor. My guess is that it would be easier to simply require that all persons actually giving investment advice put their client’s interest first. It’s simple and straightforward. As I mentioned earlier, the costs of conflicted investment advice are huge and they come, in large part, at the expense of retirees. …”

“Further, at a minimum, wrongdoers must be required to disgorge the profits obtained from their wrongdoing. Crime should not pay, but unfortunately, sometimes it does. Currently, the Commission is limited to obtaining five years’ worth of ill-gotten gain as a result of a recent Supreme Court decision. This means that clever wrongdoers are able to retain tens of millions of dollars of investors’ money. When crime pays, investors, including retirees, pick up the tab. The solution to this problem does not lie at the Commission. This is something that Congress must fix and I urge them to do so.

However, the Commission can ensure that known wrongdoers are unable to repeatedly access our markets—and retirees’ hard-earned savings. For instance, the Commission can bar lawyers and accountants from practicing before it, bar broker-dealers and investments advisers from the industry, and request officer and director bars. The Commission also can apply certain restrictions on issuers who have engaged in bad conduct. These limitations are prophylactic measures to prevent known wrongdoers from victimizing new investors. When the question comes up, we always ask ourselves — do we trust this person or entity with other people’s money? If the answer is “no,” then they should not be in the securities industry. We must take this responsibility seriously. People are counting on us.”

Read Full Speech

DOL Fiduciary Rule

Although the U.S. Court of Appeals for the 5th Circuit vacated the DOL’s Fiduciary Rule, it is “only mostly dead.” It appears that the DOL plans to issue a revised final fiduciary rule in September 2019, based on the comments from the Court.

It also appears that the SEC will be finalizing its final advice standards regulations in September 2019. It has been suggested that perhaps the two agencies would work together and issue a joint rule.

Read Full Article


Competition: The Forgotten Fourth Pillar of the SEC’s Mission

On October 11, 2018, SEC Commissioner Robert J. Jackson, Jr. spoke to the Open Markets Institute about the “unprecedented concentration of power in the American Economy” and the costs of that concentration to investors, that “everyone has less choice today than they did decades ago when they seek advice from Wall Street.”

There used to be the Big Eight accounting firms, then it became the Big Six, and now it’s the Big Four. We currently have 13 public stock exchanges, but 12 are owned by just three corporations. Just three firms are responsible for rating most debt securities, two major firms advise investors on how to vote their shares, and one company counts the votes in the vast majority of corporate elections.

“As a result, ordinary investors are driving on roads riddled with tollbooths. You see, when an industry is dominated by just a few players, those players can exploit their market power to extract rents from the broader economy. The bundling, cross-subsidization, exclusive contracts, and price discrimination we see throughout our securities markets aren’t free. American investors and entrepreneurs pay for them in the form of higher costs and distorted decisions about the capital allocation that will define our economic future.”

Commissioner Jackson’s conclusion is that:

“It’s common at the Commission to refer to our “tripartite” mission: investor protection, fair and efficient capital markets, and capital formation. But I hope I’ve convinced you today that as a matter of history, law, and economics, our mandate also includes ensuring robust competition in our capital markets. And the forgotten fourth pillar of the SEC’s mission reinforces the other three: more competitive markets are more likely to be efficient, promote capital formation, and most of all, protect investors.”


Our Perspective

We have finished another fiscal year, and probably in January or February the SEC will let us know how we have done as an industry and their priorities for FY 2019 based on the examinations they have performed in FY 2018. To those of you who are not numbers folks, we apologize for the first section of this article, but we find statistics very entertaining, as we know many of you do.

We found the two speeches by the Commissioners especially interesting because both focused on the investor, not those of us in the industry. Commissioner Stein’s speech about how the SEC can help protect the investor, especially with the idea of permanent bars, and Commissioner Jackson’s speech about increasing competition and lowering costs. We would strongly encourage you to read both of these speeches.


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