Mandatory Third-Party Compliance Reviews
The SEC staff is actively developing a rule to mandate the use of third parties in connection with compliance examinations of investment advisers.
The IAA supports the goal of enhancing the SEC’s oversight of the advisory profession. However, we strongly believe that compliance examinations are inherently governmental functions and oppose any efforts to outsource this critical SEC responsibility. Examinations must be effective, substantive, risk-targeted, and conducted by examiners who understand relevant regulation, the nature of the businesses being examined, and the industry as a whole. We agree with Chair Mary Jo White when she says that SEC examiners are the most qualified to carry out this mission, and that’s why we have steadfastly argued that the best approach is to enhance the SEC’s own examination program by hiring more examiners and using existing resources more efficiently.
In an effort to significantly increase its annual on-site investment examination rate of approximately 10 percent – and faced with continuing Congressional opposition to increasing funding to sufficiently expand the agency’s examination program – the SEC staff is developing a rule requiring advisers to pay for third-party compliance reviews. This may also include determining what role an SRO, such as FINRA, could play in these reviews.
While admitting that it’s not the “optimal” approach, Chair White appears to be convinced that a third-party examination program may be the best remaining option available to the SEC to increase adviser examination rates, because it would not require Congressional approval.
On November 18, 2015, Chair White testified before Congress that at her direction the SEC staff is “preparing a recommendation to the Commission for proposed rules requiring third-party compliance reviews” for investment advisers. She added that the reviews would not replace examinations conducted by OCIE, but would be “designed to improve overall compliance by registered investment advisers.”
We believe that an SEC rule proposal requiring investment advisers to hire and pay for third party compliance reviews is a very real possibility for 2016.
The scope remains unclear – the proposal could range anywhere from requiring costly full scope SEC-type mock examinations to more limited engagements in agreed-upon areas.