Third-party advisor exam proposal not dead yet, IAA warns

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WASHINGTON -- The possibility of third-party advisor examinations may have dimmed in the short term — but a prominent trade group opposing it is warning advisors that the issue could resurface.

Chairman Jay Clayton has trimmed the SEC's published regulatory agenda to include only items that the commission intends to act on in fairly short order, officials said at the Investment Adviser Association's annual compliance conference.

So while the SEC is actively developing a framework to set new standards of conduct for brokers and advisors, the proposal to tap a third party to increase RIA exams has dropped off of the so-called regulatory flexibility — or reg flex — agenda that the commission publishes.

But the trade group cautions that the idea could easily come back.

"Just because something slipped off the reg flex agenda doesn't mean it's still not a long-term priority," said Neil Simon, the IAA's vice president for government affairs. "My own feeling is this remains an issue we have to be vigilant [about]. We have to continue our efforts to educate policymakers."

The question of how to increase oversight of the RIA sector has been kicking around for years, a debate that has languished amid a low — albeit increasing — annual examination rate within the sector.

"I think this is an issue that really is an evergreen issue. It just does not seem to go away," said Karen Barr, the IAA's CEO.

While the IAA has been supportive of efforts to enable the SEC to increase its exam rate, it has been an outspoken opponent of outsourcing examinations of its members to another group — be it FINRA, a public accounting firm or any other entity.

The group warns that inviting an outside organization to conduct advisor exams "would impose a costly additional layer of regulation and bureaucracy on advisors without providing a commensurate benefit to investor protection."

The IAA contends that the SEC's exam rate is misleading because the commission's Office of Compliance Inspections and Examinations prioritizes high-risk firms and larger firms that manage an outsized portion of investors' assets. The exam rate ticked up to 15% of all registered advisors last year.

Moreover, the commission has been touting its efforts to reach more advisors by shifting broker-dealer examiners over to OCIE's advisor unit and narrowing the scope of the exams in a bid to visit more firms.

"It has been extremely successful in getting the exam rate up, so I think we are going to continue to advocate that OCIE continue to streamline its exam program, make it more efficient, and therefore less likely that there be a need for a third-party exam," Barr said.

Policymakers tend to fixate on the exam rate as a ready-made talking point to make the case that there is insufficient oversight of the industry, Simon observed. And the debate over measures to increase oversight of the sector could come back with a vengeance should a massive fraud like the Bernie Madoff scandal unfold in the RIA sector.

"I think this is one you can never turn your back on completely," said Mara Shreck, head of regulatory affairs at the asset and wealth management unit of JPMorgan Chase. "The next time there's a Madoff or something this might come back, because ... it's a number that will always be asked about from Congress."

The IAA is making its voice heard on other issues as well. It has appealed to the SEC to revisit and update a variety of advisor regulations including the rules governing advertising and custody of assets

The trade group would also like to see Congress reinstate the limited deduction for advisory fees that was wiped away in last year's tax overhaul. Additionally, the IAA is appealing for lawmakers to reconsider the provision in the tax bill that excluded advisors from enjoying a favorable 20% deduction rate for certain pass-through entities.

"We think that is unfair. This provision was intended to spur job creation, and in fact investment advisors have been an engine for job creation," Simon said.

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Regulatory actions and programs Enforcement SEC enforcement Karen Barr Neil Simon Jay Clayton IAA SEC FINRA