SEC Chairwoman Mary Jo White headed to Capitol Hill to appeal for a modest budget increase, funding she says is needed to increase examinations of investment advisors and to bolster the commission's enforcement and rulemaking activities.
Testifying before the House Financial Services Committee on Tuesday, White also called for a uniform fiduciary standard that would apply in equal measure to advisors and broker-dealers, though she stressed that she is only in the early stages of developing a rule proposal, and will be working closely with staffers and her fellow commissioners on the issue.
Additionally, the chairman weighed in on the challenges the SEC's Office of Compliance Inspections and Examinations has had in its work conducting on-site audits of advisory practices, expressing reluctant support for a proposal to tap a third-party organization to help oversee the industry.
'TIME IS NOW TO ACT'
"As the head of the agency, I look at what I think we need to be doing for investors and to fulfill our duties at the SEC, and then look ... at the possibility of third-party exams to supplement, complement our OCIE examiners. It's not an optimal place to go, but I think we really do need to complement our ability to cover those investment advisors -- very important to particularly retail investors, but really the entire marketplace," White said.
She quickly added that many questions need to be resolved before the commission might move ahead with such a plan, including the selection of an appropriate third-party organization to take on advisor exams, the criteria those reviews would cover, costs and the determination of which advisors would be subject to the program.
Nonetheless, White said that the proposal, imperfect as it may be, is worth pursuing. "I do think the time is now to act," she said.
White told members of the committee that she has been endeavoring to reallocate resources within the commission to free up the exam staff for advisor reviews, and aiming to do a better job of dispatching examiners to the areas of the industry that pose the greatest risk. Even with those changes, however, OCIE was only able to examine about 10% of all registered advisors in fiscal 2014, though those practices accounted for 30% of all assets under management in the RIA space, White said.
The SEC is asking Congress for a budget of $1.722 billion for fiscal 2016. If lawmakers grant that appropriation, the SEC says it would hire 431 new staffers, more than half of whom would be added to the examination division. Others would land in the enforcement unit, where they would help with investigations, data analytics and legal proceedings.
In making her case for the SEC's budget request, White noted the dramatic expansion of the size and complexity of the markets that the commission polices. In the RIA space, for example, assets under management have increased more than 250% since 2001, soaring from $17.5 trillion to $62 trillion, according to the commission.
"Specifically, this budget would permit us to further address the pressing need for additional examination coverage of registered investment advisors and investment companies to better protect investors and our securities markets," White said.
Some Republicans on the Financial Services Committee challenged the SEC's appeal for a larger appropriation, citing a series of budget increases the commission has received, including a sharp rise since the enactment of the Dodd-Frank Act.
"The facts are that the SEC's budget has grown tremendously over the years," said committee Chairman Jeb Hensarling (R-Texas), who argued that the growth of the commission's appropriation "considerably outstrips most other government agencies."
Hensarling and others also took White to task for not having yet completed rulemaking proceedings mandated under the JOBS Act, which she conceded had proved to be a more complex task than commission staff anticipated.
On the uniform fiduciary standard, an issue that investor advocates and some trade groups have been lobbying for, White acknowledged some of the challenges that will emerge as the commission crafts a proposal, including how to define the standard and issuing clear guidance so advisors and brokers can determine what business practices will be permitted under the rules.
Some advocacy groups have warned against what they describe as a campaign by representatives of the brokerage industry to water down any fiduciary standard that would apply to that sector, cautioning that any rules the SEC develops must retain strong consumer protections that require all parties to act in their clients' best interests.
Rep. Maxine Waters (D-Calif.) echoed that concern at Tuesday's hearing.
"I'm pleased that you support a harmonized fiduciary duty rule that will protect America's investors and retirees," Waters said. "But the devil is in the details, and we must take care not to weaken existing protections in pursuit of a uniform standard."
Several representatives pressed White on the extent that the commission has been working with the Department of Labor on a separate proceeding to impose fiduciary responsibilities on advisors working in the retirement space, a proposal that has sparked heavy criticism from the brokerage industry and many members of Congress.
"We are separate from the Labor Department," White responded. "They have separate jurisdiction."
She did note that SEC staffers have been providing "technical assistance" to the Labor Department, advising officials there on the nature of the advisory market and the potential impact any rules could have on investors.
"I would expect us as we go forward to continue to consult, which I think's very important," she said.
Some committee members also challenged White on the timing of her announcement of support for a uniform fiduciary standard, suggesting that she might have been swayed by the recent move by the DoL to advance its own rulemaking.
White insisted that she came to her decision independently, saying that she has long been concerned about the disparity in regulation of brokers and advisors and the potential for investor confusion that it creates.
"When you have essentially identical conduct regulated differently -- particularly in the retail investor space -- you've got to think long and hard about why that regulation shouldn't be the same," she said.
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