Page 34 - Investment Advisor April/May 2023

individual investors in 2020, almost all follow-up questions from examiners. Michael Canning, principal and
of whom were non-high net worth indi- Onsite exams tend to lead to more find- founder of the LXR Group in Washington
viduals. Just one year later, that number ings for this reason. They are much more and a former director of government
grew to 50.6 million clients.” thorough than off-site exams.” affairs at the North American Securities
Commissioner Hester Peirce, a The SEC, Lynch added, “could also Administrators Association, told me that
Republican, noted in her comments take different approaches to how exams Congress will have to get involved again:
that “determining how best to deploy are conducted, such as doing more lim- “It’s fair to say that there is no way
the Division of Examination’s never- ited-scope exams or targeted exams” to the [advisor exam rate] problem gets
enough resources is a yearly challenge.” help boost the exam rate. addressed without congressional involve-
The SEC’s exam staff, she said, “is the Greiner noted that challenges for ment, and you don’t get congressional
face of the commission, and we need to the exam division include not only the involvement on an issue this complex or
figure out how best to support them in growth in the RIA industry but also new this important to so many stakeholders
their work.” products and risks. unless you hold a few hearings.”

“The growth in the industry simply makes it impossible for the SEC to

keep up. Its use of specific subject matters for review is creative, but
ultimately unavailing. There is a need for a private sector regulatory
body. The SEC could facilitate this development by encouraging RIAs

voluntarily to join a private sector regulatory body.”

—Harvey Pitt

Natasha Vij Greiner, deputy director Former SEC Chairman Harvey Pitt, Options that have been on the table
of the SEC’s Division of Examinations, who’s now CEO of Kalorama Partners for increasing SEC exam frequency all
said at the meeting that the SEC plans in Washington, told me in an email that require congressional action, Canning
to “significantly” increase onsite exams it has been his view “for a very long said. Those options, he explained,
of advisors within the next six months, period of time that the SEC is NOT able include: lifting the cap for federal reg-
adding that the 15% exam rate in 2022 adequately to examine” advisors. istration in Dodd-Frank so that states
was “achieved despite continued “The growth in the industry simply take on more responsibility; creating a
growth” in the RIA industry. makes it impossible for the SEC to keep self-regulatory organization for RIAs; or
“Going forward, as the industry con- up,” Pitt said. “Its use of specific subject authorizing the SEC to assess user fees
tinues to grow and change, maintaining matters for review is creative, but ulti- to fund additional exams.
our coverage ratio can only be achieved mately unavailing. There is a need for “In theory, the SEC could recognize
with sustained investments in human a private sector regulatory body. The an IA SRO under its existing author-
capital and technology resources,” SEC could facilitate this development ity, but no one I’ve ever spoken with
Greiner said. by encouraging RIAs voluntarily to join inside or outside the agency believes it
However, Amy Lynch, founder and a private sector regulatory body.” would take this step absent direction
president of FrontLine Compliance, told RIAs, he explained, “would be from Congress,” Canning added.
me that doing more onsite exams start- required to undergo compliance audits, Unfortunately, he continued, “I
ing in April “will slow the process down, with reports given to the SEC staff. That don’t think we’ll get a sense for where
not speed it up. So the challenge will would enable the SEC to pick up any this issue ranks in terms of House
remain unless Congress provides more trends as they develop.” Financial Services Committee prior-
funding or the growth rate of advisors ities for the year — including with
slows, which is highly unlikely, given the CONGRESSIONAL ACTION NEEDED respect to potential for hearings —
exodus from the sell side to the buy side.” In 2011, to help boost the SEC’s exam rate until [SEC Chairman Gary] Gensler
Onsite exams, Lynch said, “force the of advisors, Dodd-Frank raised the assets testifies for the first time before the
examiners to be focused on just the one under management threshold for state newly reconstituted” committee.
exam, so they cannot multi-task on sev- regulation of investment advisors from $25
eral exams at a time. Plus, [onsite exams] million to $100 million. As a result, 2,100 Washington Bureau Chief Melanie Waddell can
tend to be more focused and lead to more advisors switched to state registration. be reached at [email protected].

32 INVESTMENT ADVISOR APRIL/MAY 2023 | ThinkAdvisor.com