SEC Should Outsource RIA Examinations, According to Study by James Angel

December 05, 2011 James Angel

Results Include More Frequent Examinations and Better Resource Utilization

The U.S. Securities and Exchange Commission should outsource routine examinations of investment advisors, suggests James J. Angel, associate professor of finance at Georgetown University’s McDonough School of Business, in a new study on the regulation of these advisors.

The study, titled “On the Regulation of Investment Advisory Services: Where Do We Go from Here?” examines several recent proposals to improve the oversight of registered investment advisers (RIAs). The SEC recently has documented that it currently examines RIAs at a rate of approximately once every 11 years. Angel suggests that routine examinations can be outsourced to independent third-parties such as accounting or consulting firms, and that routine examinations could be performed by self-regulatory organizations (SROs) such as FINRA.

“Outsourcing routine examinations to private industry will result in more frequent examinations and will stretch limited SEC resources that can be used elsewhere,” Angel said. “It also would provide the benefits of competition in the provision of examination services.”

He does not see the need, however, for a mandatory SRO for the adviser industry. “SROs do a lot more than just examine their members. They also write rules, set standards, and enforce them. So far no one has documented a need for anything other than more frequent examinations to make sure that RIAs are in compliance with our securities laws. No one has made the case that an SRO would do a better job of setting RIA rules than the SEC.”    

The study, funded by a grant from TD Ameritrade, can be downloaded at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1951991. His earlier study with Georgetown McDonough Professor Douglas McCabe, “Ethical Standards for Stockbrokers: Fiduciary or Suitability?” can be downloaded at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1686756.

Angel is an associate professor of finance at Georgetown’s McDonough School of Business where he studies the structure and regulation of financial markets. His courses include Financial Markets, Corporate Finance, and The Great Books in Finance.  

About Georgetown University’s McDonough School of Business
Georgetown University’s McDonough School of Business is a premier business school located at the center of world politics and business in Washington, D.C. Some 1,400 undergraduates, 1,000 MBA students, and 1,200 participants in executive education programs study business with an intensive focus on leadership and a global perspective. Founded in 1957, the business school today resides in the new Rafik B. Hariri Building, a state-of-the-art facility that blends the tradition of Georgetown University with forward-thinking functionality. For more information about Georgetown’s McDonough School of Business, visit http://msb.georgetown.edu.