Ex-SEC Chair Warns Of Adviser Exam Shortfall ‘Disaster’
By Ed Beeson of Law360.com
Former U.S. Securities and Exchange Commission Chair Mary Jo White on Friday sounded an alarm about the agency’s inability to conduct regular inspections of most registered investment advisers, calling it “a disaster waiting to happen” if the pace can’t be picked up.
Speaking at a Practising Law Institute event in New York, White didn’t elaborate on what she meant by disaster, but she said it was one of the things that greatly concerned her during her tenure as Wall Street’s top cop.
There are currently about 12,500 advisers registered with the SEC, but the agency’s exam staff are only able to visit about 12 percent of these firms each year, she said.
“That’s a disaster waiting to happen,” White said. “Until that percentage of examinations gets to approach 50 percent a year,” which she noted is the current pace of exams for broker-dealers, “it’s a real problem that keeps me up at night.”
Her comments on advisers were one of many candid observations she offered on the current state of financial regulation and enforcement. Among other things, White, who is now senior chair of Debevoise & Plimpton LLP, praised recent remarks by Deputy Attorney General Rod Rosenstein, who has pledged to improve the government’s efforts at coordinating enforcement activity in a bid to avoid the “pile-on” effect that beguiles corporations in the crosshairs of various government agencies.
White said she regretted not being able to institute a uniform fiduciary duty rule for advisers and broker-dealers who give personalized advice to retail customers, but gave a vigorous defense of the so-called “broken windows” enforcement policy she put in place.
The shortfall in adviser examinations has been an issue that has long dogged the SEC, particularly as the number of registered advisers has swelled in recent years, but filling the gap has proven difficult. Like her predecessors, White frequently sought greater appropriations from Congress to hire more examiners, only to be rebuffed by lawmakers controlling the agency’s purse strings.
Speaking Friday, White said that because funding increases likely aren’t in the cards for the SEC, the agency should consider revisiting is third-party compliance audits for advisers. The SEC was mulling a proposal last year, and White said the agency had settled on an independent organization, which she did not name, to conduct the examinations.
But a proposal was never publicly issued and current SEC Chairman Jay Clayton recently has shown little interest in the idea, telling a Brookings Institution conference in September that third-party exams are “not in front of my mind right now.”
White urged the SEC to take up the idea. A third-party examiner could be used to check basic practices of advisers, such as whether they have compliance programs or maintain custody of their clients’ assets, she said.
Barring that, White said her third choice would be to put the Financial Industry Regulatory Authority, which currently oversees brokerage firms, in charge of inspecting advisers.
Reflecting on her days as SEC chief, White also said the SEC had a positive impact on the market by applying the “broken windows” theory to the securities laws. Under this approach, the agency brought, in one fell swoop, dozens of small enforcement actions against, for example, brokerage firms that violated short selling rules or municipal bond issuers that failed to comply with their obligations to continually update disclosures to investors.
One of the SEC’s current co-directors of enforcement recently raised questions about whether the agency will continue to bring such cases. Speaking at a conference in October, Steven Peikin said his division likely would be “selective and judicious” and “bring a few cases to send a message” rather than aiming for dozens of actions, owing to resource constraints on his division.
But White, in her remarks, said she didn’t believe the SEC would entirely abandon the broken windows approach because the cases it brought ultimately were both efficient and achieved the results of cleaning up bad industry practices.
“My only regret is I did not stick to my original name for this initiative: Blitz and bundle,” she said, before quipping: “It has a ring, don’t you think?”
The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.