SEC Commissioner Says SRO Report is Inadequate

Despite voting to allow the report to be released, Commissioner Walter said she is “disappointed with the result.”  She said her addendum to the report is to “ensure that Congress knows that the current resource problem [at the SEC] is severe…and will only be worse in the future.” (See “SEC Publishes Report About RIA Oversight.”)

Walter does not dispute the statistics provided in the report that show how the number and frequency of examinations has dramatically decreased in recent years. She believes it is important to draw from these statistics the conclusion that “unless significant changes are made, [the SEC] cannot fulfill its examination mandate with respect to investment advisers.”

The math behind the SEC’s impossible task, Walter said, is clear. The SEC office responsible for examinations, the Office of Compliance Inspections and Examinations (OCIE), currently has 460 examiners responsible for investment advisers. That number would need to be doubled for the frequency of examinations to even reach 20%–an impossible increase with current budget restrictions and an inadequate percentage of examinations, Walter asserted.   

Walter is concerned that the comparisons drawn to the National Securities Markets Improvement Act (NSMIA) of 1996 were relied upon too heavily. While NSMIA did substantially lower the number of RIAs under the SEC’s jurisdiction, as Dodd-Frank will likely do, NSMIA did not pave the way for more complex advisers to be added to the SEC’s jurisdiction.   

The three recommendations the report suggests Congress weigh were not described in a “balanced or objective” manner, Walter wrote. She believes the report highlighted the benefits of user fees to bolster the SEC’s budget situation, but it did not describe any of its drawbacks, nor did it mention that an SRO would have many of the same benefits. She also said the SRO option was written largely from the viewpoint of the investment management industry, which opposes the SRO solution.   

Walter favors the SRO option, saying it will “increase the frequency of examinations of investment advisers–this directly answering the question that Congress posed to us.”  She goes on to list several other benefits of an SRO that were not included in the original report.   

Her complete letter can be seen here.