The Deck Is Stacked
Not only does the SEC still conduct exams of broker-dealers and Finra, but the OCIE's staff allocation is heavily weighted toward broker-dealers as well. So why would B-Ds not be charged user fees?
And why not mutual funds, which seem to have received a papal dispensation when it comes to calculating user fees? (Asset managers for mutual funds don't get counted.) It's not like mutual fund complexes don't have deep enough pockets to pony up user fees. Like their broker-dealer brethren, they consume a disproportionate amount of OCIE staff resources-unlike RIAs. But apparently money talks, and lobbying dollars are speaking loudly.
Aside from the financial burden the current user fee proposal would saddle RIAs with, there is a serious conflict of interest that the industry seems to be overlooking-one that desperately needs to be addressed before any user fee legislation is enacted.
As currently written, the proposal actually encourages the SEC to be as inefficient as possible in conducting advisor examinations. The agency would generate more revenue for itself if it conducted lengthy, onerous and inefficient examinations that took weeks or months, rather than giving advisors expeditious and focused examinations with the help of technology and third-party sources of information. There exists absolutely no incentive for the commission to ease the burden, since doing so would only shorten its exams and decrease its morphine drip of direct funding.
I'm not suggesting that the SEC should emulate the advisor "performance fee" model-only getting paid more when it can demonstrate that it has prevented a fraud. But there must be controls and accountability when it comes to conducting examinations, otherwise RIAs might need to spring for the room and board for OCIE examiners, considering the amount of time the examiners will be staying on site.
Rewind The Tape
Government should be involved in the private sector when and only when its involvement is in the public's best interest. The more government immerses itself in the "solution" of advisor examinations, the more I cringe at the future of our industry, now the shining star of financial services. Nobody understands the complexities and challenges of this business better than independent advisors themselves, and virtually all of them know that removing the incidences of fraud helps promote the industry's continued robust growth. If any industry is going to embrace the power of free and enterprising markets, it's this one.
If it could be shown that more frequent examinations would have a material impact at reducing fraud within the industry, let's pursue the concept proposed by the SEC itself in February 2003. That plan would "require each fund and advisor to undergo periodic compliance reviews by a third party that would produce a report of its findings and recommendations." The "examination staff could use these reports to identify quickly areas that required attention, permitting [the SEC] to allocate examination resources better and, as a result, to increase the frequency with which [its] staff could examine funds and advisors. Funds and advisers with reports indicating that they have effective compliance programs could be examined less frequently, which would reduce the burdens on them of undergoing more frequent examination by [SEC] staff."
Now it comes down to picking our poison. I'll take the one that allows advisors to continue their success trajectory. I think we can aspire to do better.
Author and Rolling Stone political columnist P.J. O'Rourke was once famously quoted as saying, "Giving money and power to government is like giving whiskey and car keys to teenage boys." Perhaps before we hand over the keys of the examination kingdom to the SEC, we should be absolutely certain that it's prepared to drive responsibly.
Brian Hamburger, JD, CRCP, AIFA, is the founder and managing director of MarketCounsel, the leading business and regulatory compliance consulting firm to the country's pre-eminent entrepreneurial investment advisors. He is also the founder and managing member of the Hamburger Law Firm.