The Case for Third-Party RIA Compliance Reviews

It’s a common argument applied across industries that saddling all service providers with onerous preventative regulations will just slow down the good apples, without rooting out the rotten.

Whether or not that is true depends on who you ask—but according to CEFEX, provider of compliance support and reviews in the registered investment advisory (RIA) industry, the Securities and Exchange Commission doesn’t seem to think so. At least, not as it pertains to establishing greater numbers of mandatory third-party compliance reviews for RIA practices.

On February 9, 2016, CEFEX met with SEC Commissioner Kara Stein to “describe our certification process and to communicate our view that a third-party audit program appears to be the most favorable approach for increasing oversight of RIAs,” explains Carlos Panksep, CEFEX managing director. Panksep notes that CEFEX requested the meeting, which was accepted by Commissioner Stein, to share commentary on a potential rule and discuss SEC Chair Mary-Jo White’s suggestion back in November 2015 that the regulator was seriously considering new rules requiring third-party compliance reviews for registrants.

That particular suggestion from Chair White did not grab as much immediate attention as, say, the SEC’s ReTIRE Initiative or some other broad-based projects targeting brokers and RIAs, but it may have the most significant impact. (Also see “SEC Kicks Off Cybersecurity Assessments.”) Panksep explains that the SEC is clearly in listening mode as it pertains to the need for a new rule and the eventual shape of any regulations proposed, but CEFEX is already thinking about how it will tailor its own programming to help advisory firms meet the potentially forthcoming SEC rules. “I also welcome comments from certified firms regarding your experience with both third-party and SEC compliance audits,” he says.

Admittedly, CEFEX is not exactly in a difficult position from which to advocate for more mandatory reviews and compliance requirements, but the firm also makes the argument that greater prevalence of third-party reviews would do a lot to solve the deep-seated compliance issues being hotly contested in today’s investment markets. As Panksep and others have argued, third-party reviews of practice compliance could be a more subtle and adaptable approach compared with the blanket policy approach being taken by the Department of Labor (DOL) in its separate fiduciary rulemaking.

NEXT: What CEFEX told the SEC  

Panksep says he told the SEC that CEFEX believes a third-party review program can be successfully implemented “in a way which leverages the broad reach of private-sector examiners while maintaining critical SEC oversight.” It is always a fine line between effective regulation and affordable regulation, Panksep explains, but leveraging existing industry infrastructure, whether public or private, will be critical in keeping the cost of compliance with any new rulemaking down to an acceptable level.

“As mentioned in our meeting, CEFEX runs a scalable online examination system which can serve as a practical model,” Panksep says. “CEFEX-certified advisory firms voluntarily subject themselves to our examinations, thereby demonstrating that the examinees are well-organized, transparent, and operating in conformity to specific fiduciary practices.”

An SEC third-party examination program should focus on “straightforward, evidence-based fact-finding like asset verification and consistency between advisory practices and Form ADV and website disclosures or other marketing materials,” Panksep argues. “The program would assess conformity to specific practices that the Commission deems to be most conducive to examination by a third party. It could also help uncover potential problems that may require more in-depth review by SEC examiners, thereby enabling the SEC build a more complete risk-profile of advisory firms examined so it can direct greater resources to higher-risk firms.”

From previous discussions with the Office of Compliance Inspections and Examinations (“OCIE”), Panksep feels that it is “helpful for National Examination Program staff to have access to independent information and exposure to private sector analytical tools.”

“A well-designed external examination program can help achieve these desirable outcomes, in addition to meeting the core objective of providing factual findings on matters specified for examination by the SEC,” Panksep concludes. “I look forward to the SEC’s proposed third-party exam initiative and will gladly provide comments. In the meantime, I would be pleased to offer details of our examination program to others at the Commission.”