SEC Compliance Chief Is Getting More Muscle This Year

Financial advisors who sleep well at night figuring Uncle Sam won’t come knocking on the door looking for a good look at their books, may want to think again.

That after Marc Wyatt, director of the SEC’s Office of Compliance Inspections and Examinations, and chief examiner at the agency, said in a speech to an investment advisory group

“It keeps me up at night,” Wyatt told his audience at the IA Compliance Watch in Washington, D.C. earlier this year. Wyatt favors - and will get – significantly more manpower in monitoring financial advisory activity later this year.

According to SEC chairwoman Mary Jo White, the agency will hire and train 100 new financial advisor examiners by September, which at least will help Wyatt sleep better at night.

“We're looking at the risks, and we’re trying to determine which firms, which funds, which business activities represent the highest risk to investors,” Wyatt noted at the IA Watch conference. “We want to dedicate our time and limited resources at those firms.”

Wyatt did note the SEC was less likely to bring the hammer down on advisory firms struggling with cybersecurity issues, which he deemed complex. But his office, especially when it’s newly-armed with 100 examiners, will play closer attention to “higher risk” firms that engage in high-frequency trading.

Investment industry experts say the advisory industry actually welcomes closer scrutiny

“Reputable advisors definitely welcome more oversight by the Securities and Exchange Commission,” says Robert R. Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.

“When bank robber Willie Sutton was asked why he robbed banks, he responded “Because that’s where the money is.” Unfortunately, some nefarious people are attracted to the industry for just that reason,” Johnson states.

Johnson does make a key point. Even though the vast majority of financial services professionals are hard working, reputable individuals who are acting in the best interests of their clients, the profession is always near the bottom of listings of most trusted professions, he says. “A recent Gallup poll listed stockbrokers as the sixth least trusted profession,” Johnson adds. “Only advertising practitioners, car salespeople, telemarketers, members of Congress, and lobbyists ranked lower.”

The financial crisis did a great deal to erode trust in the financial markets and financial advisors,’ he notes. “The Madoff scandal did a great deal of damage to the financial services professional.  Prior to Madoff the first question potential clients asked advisors was “what have your returns been and what can I expect in the future?”  Now they ask “how do I know my assets will be safe and can I trust you?”

In that changing environment, regulators need to have both the ability and willingness to regulate – and ability means that they have properly trained advisors,” Johnson says.  “To date, the Federal government has not shown either the ability or willingness to regulate the financial markets.”

“The typical background of an SEC examiner involves legal training and not financial training.  The SEC needs to hire people with financial backgrounds and expertise in finance to properly regulate,” he adds. “One of the reasons Madoff went undetected was that the SEC regulators didn’t understand finance and didn’t realize that the returns Madoff was reporting were not possible in a volatile market environment.”

With 100 more SEC agents on the way, that scenario less likely – although it may lead to more advisors losing sleep at night.

Brian O'Connell is a former Wall Street bond trader and author of the best-selling books, such as The 401k Millionaire. He's a regular contributor to major media business platforms. He resides in Doylestown, Pa. Brian may be reached at [email protected].
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