This week, Rick Fleming, the SEC’s Investor Advocate, delivered a speech at the Southwest Securities Conference in Dallas, Texas. In his remarks, Fleming described the newly created Office of the Investor Advocate, created under the Dodd-Frank Act, and the core issues impacting investors that the office will focus on during its inaugural year. In addition, Fleming acknowledged the need to provide the SEC with sufficient funding to “conduct an adequate number of investment adviser examinations,” going so far as to recommend Congress authorize the SEC to collect user fees as a long-term solution to funding RIA examinations. The following is an excerpt from his speech, the full text of which can be found here.
“As many of you are aware, the SEC examined only about 9 percent of registered investment advisers in Fiscal Year 2013. This equates to a frequency of approximately once every 11 years, a rate that many observers find unacceptable.
“There are multiple reasons for the lack of exam coverage, but in my view it primarily boils down to the fact that the SEC has not received sufficient resources to keep up with the burgeoning workload. The number of SEC-registered advisers has grown by approximately 40 percent over the past decade to nearly 11,500 today. And, as the number of investment advisers has grown, so too has their complexity. The amount of assets managed by investment advisers is on a steep ascent, climbing from $20 trillion a decade ago to an estimated $55 trillion by the end of Fiscal Year 2015. In comparison, staff in the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has grown only about 10 percent in the past decade.
“From my own personal experience, I know that investors are exposed to fraud and abuse when regulators cannot maintain an adequate regulatory presence. While most investment advisers are trustworthy and honest, I have personally prosecuted one who stole more than $7 million from his clients. In the course of that case, I met with numerous victims who did everything right – they worked hard, saved their money, and entrusted their savings to a licensed person who they thought was investing it in a normal portfolio of legitimate securities – only to have their life savings taken by that licensed “professional.” For those investors, an ounce of prevention would have been worth far more than the pound of cure. With their money gone, a maximum prison sentence did little to help those retirees who had to return to work or face a diminished standard of living, or the individual with diminished capacity whose trust fund was stolen, or the church that lost its building fund.
“Not surprisingly, then, as my very first recommendation to Congress, I recommended that Congress appropriate the needed funds this year so that the Commission can hire more examiners without further delay. In addition, I voiced support for a more long-term, sustainable solution. I recommended that Congress authorize the SEC to collect an annual “user fee” from registered investment advisers and to limit the use of those funds to expenses associated with investment adviser examinations.
“Admittedly, a shorter examination cycle won’t stop all fraud, but I believe it will allow the SEC to halt these types of activities sooner and will provide a stronger deterrent to advisers who might otherwise succumb to the temptation to steal. It will also curtail other unethical practices, including excessive fees, excessive trading, and undisclosed conflicts of interest. Many of you in this room have uncovered these types of practices and can attest to the damage it causes to investors.”