SEC Commissioner Fiercely Criticizes Investment Advisers. Are Big Changes Coming?

The investment industry has been steadily rebuilding its image in the aftermath of the financial crisis and the Bernie Madoff scandal. However, things are not getting fixed quickly enough for David Gallagher, the Commissioner of the SEC. Gallagher still sees major issues with how regulators deal with problem investment advisers and believes this hurts the entire financial industry.   

 Dishonest Advisers: A Small but Damaging Group

 At a recent Securities Conference, Gallagher expressed that the investment adviser industry is plagued by a small but damaging group of bad individuals. Roughly 20 percent of the 600,000 advisers on FINRA’s BrokerCheck database have between one to five problem disclosures. These include customer complaints, regulatory violations, and serious financial issues like bankruptcy or liens.

 These issues should prevent many of the problem advisers from managing money yet some firms do not always to remove them. “They manage to stay in the industry and continue to wreak havoc on the investing public,” said Gallagher. This small minority destroys trust and ruins things for honest advisers who work hard to follow the rules.

 Not Enough Action

Gallagher believes that one of the reasons these trouble advisers stay in business is because there is not enough regulatory oversight. The SEC does not have enough of a budget to carry out the needed investigations of advisers. In addition, FINRA announced this year that it no longer wants to oversee investment advisers.

 When the SEC does regulate, it focuses most of its time on broker/dealers, rather than on investment advisers. Gallagher says there is a perception that broker/dealers have more problem individuals than investment advisers, but the numbers show there are issues in both industries.

 What Needs to Change

 To fix this issue, Gallagher has a few suggestions. First, he recommends that Congress provide more money to the SEC to increase its regulatory scope. He also suggests that the investment adviser industry develop its own self-regulatory organization (SRO) to keep track of dishonest advisers.

Nothing seems set to change any time soon. Congress has currently not offered any extra funding and FINRA does not want to take this role. If a new organization were created, it would take some time, if it happens at all.

 In the meantime, honest advisers will have to keep working hard to prove to their clients that they are trustworthy, even if there are some troublemakers still hiding in their industry.