Click here to see this article in our upcoming redesigned website

Investor Advocate Reiterates Call For Advisor Examinations



Securities and Exchange Commission-registered investment advisors (RIAs) should be examined “at least every three years on average,” and the SEC should collect annual user fees from RIAs to fund the examinations, the Office of the Investor Advocate (OIA) said in its inaugural report.

No advisory firm should go longer than five years without being thoroughly examined. Higher-risk firms should be examined more frequently than every three years, the OIA also said.

“A more frequent examination cycle would allow SEC staff to identify intentional and unintentional violations sooner, which would minimize harm to investors,” the report said.

The OIA, headed by Rick A. Fleming, was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to protect the interests of Main Street investors. Investors lost trillions of dollars worth of wealth in the financial crisis.

Fleming, a former general counsel for the Office of the Kansas Securities Commission, said that during his tenure in Kansas, he prosecuted an investment advisor who stole more than $7 million in a Ponzi scheme.

Victims, however, were never able to recover.

“I am convinced that a more frequent examination cycle would have led to an earlier discovery of the scheme and minimized the harm” he said. Kansas regulators changed their examination proceedings to deter future misconduct.

Investors, he also said, “need a similar enhancement today at the federal level to provide more frequent examination of SEC-registered investment advisers.”

On June 11, the SEC announced charges against a Chicago-area attorney after an examination turned up alleged fraud in connection with a real estate investment offering.

Fleming said that while most advisors “observe the highest standards of integrity,” the SEC examined only 9 percent of RIAs in fiscal year 2013.

There are approximately 11,500 RIAs overseen by the SEC, and these companies will be managing as much as $55 trillion by the end of the 2015 fiscal year, more than double the amount of assets managed 10 years ago.

“As you read this, it is quite possible — even likely — that investors somewhere in this country are being defrauded by an unscrupulous investment adviser whose crimes have not yet come to light,” Fleming said in his introduction to the “Report on Objectives Fiscal Year 2015” document.

Ultimate IUL Client Presentations

Powerful industry trade groups, from the Investment Adviser Association to the Financial Planning Coalition to the CFA Institute have backed more examiners within the SEC’s Office of Compliance Inspections and Examinations (OCIE).

Many industry groups are willing to pay for the more frequent examinations. The SEC Investor Advisory Committee has endorsed the user-fee model, the report said. The SEC, however, hasn’t taken any action yet on user fees.

Funding more frequent examinations is seen as critical to the efficient SEC oversight of advisors as fewer advisors than expected made the switch from SEC to state registration, and as the SEC has taken on new responsibilities for the oversight of hedge funds, municipal advisors and advisors participating in the securities-based swap market.

“Advisers are using new and complex products, including derivatives and certain structured products, and also are increasing their use of technologies that facilitate such activities as high-frequency and algorithmic trading,” the report said.

Earlier this year, the SEC requested a budget of $1.7 billion for the 2015 fiscal year beginning Oct. 1, an increase of $300 million from the current fiscal year. Some of the money would go toward hiring 316 new staffers at the OCIE, which has a staff of 914.

In June, the House Appropriations Subcommittee on Financial Services and General Government approved $1.4 billion for the SEC’s 2015 fiscal year, an increase of $50 million over the current year but well short of what the SEC says it needs.

The Investor Advocate report said that in order to ensure that investment advisors be examined every three years, on average, “it will take a significant commitment of resources to go from examining 9 percent of firms per year to coverage of 33 percent per year.”

User fees, the report said, would offer a “more effective long-term solution” to ramping up the number and frequency of advisor examinations, than the SEC seeking an annual appropriation from Congress to fund more examiners.

A user fee “would also place the cost of regulation on the industry whose reputation will benefit from the enhanced regulatory presence,” the report said.

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at

© Entire contents copyright 2014 by Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from

Ultimate IUL Client Presentations


  More Exclusive INN

More Exclusive INN >>
  Most Popular Exclusive INN

More Popular Exclusive INN >>
Hot Off the Wires  Hot off the Wires

More Hot News >>

insider icon Denotes premium content. Learn more about becoming an Insider here.
Ultimate IUL Client Presentations