WASHINGTON -- Investment advisors and broker-dealers should be held to a common standard of fiduciary care when serving retail clients, and the SEC should increase examinations to ensure that firms are adhering to those rules, says commission Chairwoman Mary Jo White.
In an on-stage interview at the Investment Company Institute's general membership meeting, White reaffirms her support for a uniform fiduciary standard for the advisory sector, though she emphasizes that that view is hers alone. It is not necessarily shared by the other commissioners, she explains, some of whom have expressed skepticism about the wisdom of a new rule.
White also underscores the challenges of overseeing the RIA sector -- now numbering more than 11,000 federal registrants -- with limited resources, voicing qualified support for a framework for deputizing a third-party organization to help review advisory practices.
"Really for decades, the SEC's had the resources challenge of being able to sufficiently examine
investment advisors," she says. White notes that even amid efforts to better marshal technology and reallocate staff within the commission, the Office of Compliance Inspections and Examinations is still unable to meet its mark. "Net-net we are still only able to cover 10 % of investment advisors" in a given year, she says.
The third-party approach might be the best solution to the exam shortfall under the circumstances, though White notes that she has been advocating for greater funding for the commission to beef up the examination division, among other priorities. She has directed staffers to develop a proposal for how a third-party system might work in practice, tackling questions like how the examiners would be selected, what the exams would cover and which advisors would be subject to third-party reviews. She makes it plain, however, that any third-party system would only serve as a complement to the work that OCIE performs.
"I don't think it's optimal, by the way, to go to the third-party exams, because actually the SEC exam staff does this best -- I think they are expert at it," she adds. "I think they know what to look for, and this certainly would not supplant them even as to somebody who might receive a third-party exam, would mean our OCIE examiners couldn't go there as well."
Separately, White announced a personnel change within the senior ranks of the agency, naming David Grim as the new director of the Division of Investment Management. Grim had been holding the position on an interim basis.
Speaking with reporters on the sidelines of the ICI conference, White praised Grim, an SEC veteran, as "highly respected ... both within the building and outside in the industry."
"I'm thrilled about the appointment. He has 20 years -- a very deep -- investment-management experience. We have a very aggressive rulemaking agenda in the IM space, which he knows very, very well and is advancing that," White says. "He's just extraordinarily knowledgeable and very, very well positioned to advance that rulemaking agenda."
White offered a glimpse of that agenda in a speech in December 2014, saying that she intends to advance new rules addressing data reporting, portfolio risks and stress testing in the investment-management arena.
On the RIA front, she remains concerned about the imbalance in regulations that apply to advisors and brokers -- two classes of financial professionals that overlap considerably in the services they offer retail clients, many of whom draw no distinction between the two roles, White argues.
"Anytime you have essentially identical conduct ... that's regulated differently, you've got to think long and hard about whether that makes sense or not," she says.
The Dodd-Frank Act authorized, but did not mandate, the SEC to impose a uniform fiduciary duty in the context of the provision of advice within the retail sector, requiring advisors and brokers to put their clients' interests ahead of their own. In advocating for such a rule, White acknowledges that crafting a framework in accordance with the parameters of that statute, and finding an appropriate level of consumer protection without overregulating the industry, would be "enormously complex."
In particular, she recognizes that any rule would need to accommodate some of the distinct practices of the broker-dealer business model.
"For example, it can't be a per se violation of any uniform fiduciary duty that we may impose that you charge a commission or that you engage in principal transactions, so those are all things that have to be taken into account," she says. "But I do think it's enormously important for the retail investor that they know what the standard is that their financial advisor is operating under and that it is a high standard of fiduciary duty."
But White admits that any new consumer-protection rules requiring brokers and advisors to act in their clients' best interests might be little more than a good idea unless the commission can step up its oversight of the industry, if not through a budget increase, then perhaps through third-party exams.
"If we do, as I'm advocating that we do, advance a uniform fiduciary standard that does apply to investment advisors, and would apply to investment advisors in terms of the new standard," she says, "but if it's not complied with, if it's not enforced, it's just a standard on paper, so you really have to have a strong compliance, enforcement piece to this for it to be meaningful."
- SEC Commissioner 'Not Convinced' on Uniform Fiduciary Standard
- SEC Urged to Move on Uniform Fiduciary Rule
- SEC Chair Presses for More Funding for Advisor Exams, Enforcement