In an op-ed for the Wall Street Journal, Norm Champ, former Director of the SEC’s Division of Investment Management and Deputy Director of the Office of Compliance Inspections and Examinations, warned about the unintended consequences of implementing a third-party compliance review program for registered investment advisers. Champ cited the congressional testimony of Dave Grim, the current Director of the Division of Investment Management and Champ’s deputy director, in which Grim described the program as supplemental to exams conducted by OCIE. In recent comments, White suggested that the SEC staff is further along in developing its third-party exam recommendation than its fiduciary rule recommendation.
Champ analogized the idea to that in which “the SEC mandated that companies that wanted to issue securities use credit-rating agencies to sign off on the company’s creditworthiness” before the 2008 crisis. He stressed the conflict of interest due to companies paying their own raters and the subsequent Dodd-Frank Act in which Congress mandated that the SEC remove references to credit rating agencies. He further pointed to the move in 2003 by the SEC relating to proxy voting, which he claimed created a “duopoly” which “pursues voting positions that sometimes seem to have no relationship to enhancing shareholder value.” In 2014, the SEC released guidance which Champ argued tried “to make clear that investment managers do not have to rely on the duopoly for proxy voting recommendations.”
Champ argued that similar concerns would be raised in the context of third-party compliance program reviews. He worried that the reviews would be costly to firms who would pass the costs onto their clients and that “[t]he firms conducting the examinations would have a guaranteed revenue source with little incentive to produce quality exams or keep costs down.” He suggested that the examiners may create their own examination agendas because “the federal securities laws and rules run to hundreds of pages so it would not be economically feasible for these examiners to look at compliance with every law and rule.”
Champ also took aim at the “SEC’s failure to use its own resources efficiently.” He argued that the SEC completes approximately 1,100 exams per year with 450 examiners and that it should seek to “address its own productivity before it imposes a costly burden on advisers.” Champ also noted that 200 of the examiners are assigned to broker-dealers which are already examined by FINRA and questioned the wisdom of allowing third-party examiners instead of reallocating resources.