WASHINGTON May 9 A top U.S. regulator said on
Friday he is worried that investment advisers may be getting
away with securities violations that are going undetected, and
he called for action to improve how advisers are policed.
In a speech in Colorado, Securities and Exchange Commission
member Daniel Gallagher unveiled the results of a new SEC review
that showed an "eye-popping" percentage of licensed brokers have
checkered histories, even though they are routinely inspected by
The results of the review, he said, raise concerns about
whether many investment advisers may also be bilking mom-and-pop
investors and not getting caught as often because they are not
inspected as frequently as brokers.
"I worry that this has created the unfortunate side effect
of underreported investment adviser rule violations,
inappropriately skewing our enforcement statistics," said
Gallagher, a Republican, in prepared remarks.
In a recent statistical analysis, Gallagher said the SEC
found that 20 percent of all 600,000 licensed brokers list
regulatory violations, customer complaints and bankruptcy on the
disclosure forms they submit to regulators.
One currently licensed person, he said, has 96 complaints
and disputes, raising concerns about repeat offenders who
migrate from firm to firm like "cockroaches" where they destroy
peoples' nest eggs.
These results are particularly troubling, he added, because
brokerages face strict regulatory oversight, both by the SEC and
by the Financial Industry Regulatory Authority (FINRA), the
self-funded industry watchdog.
But investment advisers, which outnumber registered brokers
by roughly 3 to 1, face far less oversight because they are not
inspected by a self-regulatory organization and the SEC lacks
the resources to police them all on a regular basis.
Only about 9 percent of registered advisers typically get
examined by the SEC per year.
FINRA has come under withering criticism in recent months
for the quality of its database, known as BrokerCheck. The
database is meant to be used as a tool for investors to find a
Recent analyses by media outlets and legal groups uncovered
scores of problems with the disclosures that brokerages submit,
including numerous failures to report critical information.
FINRA is taking steps to correct the problem, including
weighing new rules requiring mandatory background checks for
However, FINRA's authority to inspect and police for
misconduct only extends to brokerages, and not investment
During the crafting of the 2010 Dodd-Frank Wall Street
reform law, lawmakers considered whether to give FINRA the
powers to inspect advisers, or to create a new self-regulatory
Congress ultimately punted, and asked the SEC to suggest a
The SEC in 2011 released a study that explored three
One option, which is the preferred avenue by the advisory
industry, was to ask Congress to impose user fees on advisers to
help bolster the SEC's funding.
The other two proposals involved asking Congress to either
authorize the creation of an SRO or to permit FINRA to exam
firms dually registered as brokers and advisers. Gallagher said
the latter option might be the easiest to enact, saying the SEC
should consider supporting efforts to let FINRA examine "dual
Gallagher also raised concerns about another
Dodd-Frank-provision concerning investment advisers and
Dodd-Frank gives the SEC discretion to harmonize disparate
regulations over retail brokerages and advisers. Today, advisers
are held to a higher fiduciary duty to put clients' interests
first, while brokers are only required to recommend "suitable"
Critics say these differences may confuse investors. The SEC
has been weighing whether to adopt one new uniform standard, but
has not reached a decision. Gallagher cautioned against rushing
to adopt a rule, saying the SEC should "get all the facts"
(Editing by David Gregorio)