SEC Commissioner Supports Outsourcing Compliance Exams
SEC Commissioner Daniel Gallagher recently recommended using third party exams to increase investment adviser oversight. Mr. Gallagher referenced a paper prepared by James Angel, a professor at Georgetown, which outlines the benefits of a third party exam approach. Dr. Angel proposes that third party reviews could follow the same structure as financial statement auditing. Firms would be required to retain qualified firms subject to compliance review standards set by the SEC (much like PCAO. Compliance reviews would be submitted to the SEC on a regular basis. Dr. Angel notes that the SEC has already set the precedent for such third party reviews by requiring surprise exams of assets under custody. He also notes that firms already have to do an annual compliance review; this new approach would simply require using an independent third party. Mr. Angel asserts that outsourcing exams is a much more politically viable option to oversee advisers because it does not involve creating a new SRO and it does not require the SEC to get more funding.
OUR TAKE: We believe that a firm that is serious about its compliance efforts should already retain an independent third party firm to assess its program. An independent compliance review gives comfort to senior management, clients, and regulators. One big challenge with the Angel approach is that there are far fewer qualified compliance firms than auditing firms.