SEC's new adviser exam schedule: 'We simply show up'

Unannounced exams of advisers — based on tips and complaints — on the increase, says compliance big at securities regulator; 'risk of the day'

Apr 9, 2010 @ 6:27 pm

By Jed Horowitz

Advisers grousing that the Bernard Madoff scandal has led to greater scrutiny of custodial arrangements and regulatory calls to their clients now have something else to curse him for: surprise exams from the Securities and Exchange Commission.

The SEC has indefinitely dropped its goal of inspecting some 11,000 registered investment advisers on a regular schedule, and is instead focusing its examination resources on advisers who are the subject of tips and complaints, an official said.

“We simply show up, because if there are allegations of wrongdoing we don't want to give firms a good deal of lead time to clean up,” Gene Gohlke, associate director of the SEC's Office of Compliance, Inspections and Examination said at a Practising Law Institute investment management conference on Friday.

The SEC and the Financial Industry Regulatory Authority have been criticized for failing to catch the massive Ponzi schemes of Mr. Madoff and other figures, in spite of sometimes receiving tips about abuses. As a result, OCIE now generates exam schedules based on referrals from a new SEC office that receives tips and complaints and from consultations about risk areas from other parts of the SEC. The focus, said Mr. Gohlke, is on “the risk of the day.”

Mr. Gohlke's remarks appeared to shock several of his copanelists.

Stephanie Monaco, a former SEC attorney who's now a partner at Mayer Brown, said OCIE may be chasing tips planted by competitors eager to distract their rivals with intense questioning and requests for books and records.

“We do realize this type of situation can happen,” said Mr. Gohlke, though he noted that competitors tips are often “right on the mark” because they are close to common service providers and other industry sources.

“This is a big change in the exam program,” said Paul Royce, a former director of the SEC's Division of Investment Mangement who is now with Capital Research and Management Co.

John Nester, an SEC spokesman confirmed that the agency has just instituted a TCR (tips, complaints and referral) exam system. But he said the commission hasn't totally abandoned regular exams in which advisers are selected using traditional risk-based approaches. Unlike the surprise "cause" exams, the SEC continues to give at least two weeks' notice before showing up for a traditional exam, he said.

Mr. Gohlke said he didn't know whether the new tip-influenced exam schedule will be temporary or long-term, but agreed that it will mean fewer exams for most of the 11,600 registered investment advisers under the SEC's jurisdiction..

OCIE, which has a staff of about 450 people who also are responsible for inspecting mutual funds and hedge funds, examined about 1,300 advisers last year. The rank of registered advisers, meanwhile, grows a net 200 to 300 annually, and more than 3,000 advisers have never been examined, Mr. Gohlke said.

Mr. Gohlke said that once OCIE is conducting a complaints-based exam, it will likely broaden it beyond the complaint if the adviser hasn't been examined recently or at all or is in a remote location. He also said it's likely to be salutary for advisers to know they could be examined at any time under the tip program.

The SEC in January formed an Office of Market Intelligence to coordinate the tips, complaints and referrals that come in through the agency's whistleblower office and other divisions such as OCIE. The exam unit, in turn, is making more referrals to the SEC's enforcement division. Between 8% and 9% of OCIE's inspections last year were referred to enforcement, up from an average of 5% previously, Mr. Gohlke said.

His comments came only days after SEC inspector general David Kotz found that the SEC's whistleblower office made only five award payments to tipsters totaling $159,537 since a whistleblower award program was begun in 1989.

Mr. Gohlke also confirmed reports that the division's Chicago office is piloting a program where letters are being sent to advisers who have never been examined seeking data on their practices and warning that they could receive visits within the next 12 months.

“All of our adviser (clients) that got those are now having exams,” Ms. Monaco said.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


What's the first thing advisers should do when they get home from a conference?

After attending a financial services conference, advisers can be overwhelmed by options, choices and tools. What's the first thing they should do when they get back to their office?

Latest news & opinion

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

If Finra eases firm oversight of outside business activities, broker-dealers could lose revenue

Brokerage firms would no longer be able to charge reps for supervising nonaffiliated RIAs.

Galvin charges Scottrade with DOL fiduciary rule violations

Action of Massachusetts' top regulator shows states can put teeth into a rule under review by the Trump administration.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print