SEC seeks more examiners, but SRO idea still looming
Although unlikely to emerge from Congress intact, the budget proposal released last week by the Obama administration would…
Although unlikely to emerge from Congress intact, the budget proposal released last week by the Obama administration would allow the Securities and Exchange Commission to add hundreds of RIA examiners.
Increasing the SEC’s budget to $1.57 billion in fiscal year 2013, which starts Oct. 1, from its present $1.32 billion level, would allow for the hiring of 222 new examiners, according to the SEC budget request.
Those examiners, however, likely would still not be able to keep up with the demands facing the Office of Compliance Inspection and Examinations.
The SEC budget request notes that the number of registered investment advisers under its purview has grown to an estimated 10,000 advisers with $44 trillion in assets under management in fiscal 2013, from 7,600 with $21 trillion in assets under management in 2002.
Although about 3,200 advisers managing less than $100 million in assets are switching to state registration this year under the Dodd-Frank financial reform law, the SEC is picking up about 700 advisers to private-equity funds with more than $150 million in assets under management.
That means the workload will continue to get worse. In 2005, the SEC had 19 examiners for every $1 trillion in assets under management. Now it has 10 per $1 trillion in assets under management.
“A number of financial firms spend many times more each year on their technology budgets alone than the SEC spends on all of its operations,” the SEC budget request states.
Nonetheless, adviser exams are a priority.
“In 2013, OCIE plans to hire additional examiners to focus on investment advisers and investment companies as part of a multiyear effort to increase coverage of the advisory industry, allowing OCIE to more effectively assess the risk of, monitor and examine market participants to focus on the areas in greatest need of attention,” the budget request states.
The promise of an increased focus on examinations reflects the fact that the SEC reviews only about 8% of registered advisers each year.
Such low output has sparked a debate over whether to establish a self-regulatory organization for advisers. The move would have to be authorized by Congress, where House Financial Services Chairman Spencer Bachus, R-Ala., is working on draft SRO legislation.
The SRO issue would be moot if the SEC were to devote more resources to adviser exams, according to an adviser advocate.
Analysis by the Investment Adviser Association shows that the SEC’s funding has nearly quadrupled since 2000, from $367.8 million to $1.32 billion, while adviser coverage has declined.
“It is legitimate to ask: Why hasn’t more funding been dedicated to OCIE inspections?” said David Tittsworth, executive director of the IAA. “For whatever reason, they haven’t felt like it’s a high-enough priority.”
Mr. Tittsworth said that he isn’t sure how much of an advance the latest SEC budget request represents.
“How many of those [new examiners] would be dedicated to investment adviser exams is not clear to me at all,” he said.
If the SEC does achieve the funding boost it seeks, “it’s going to be tough for them to claim they don’t have adequate resources to examine advisers,” Brian Hamburger, managing director of MarketCounsel, a law firm specializing in compliance, wrote in an e-mail.
An SEC spokesman responded that additional funds are needed just to keep up with growth in the financial services industry, much less to improve oversight.
“The SEC was underfunded in 2000, and the increases have not kept pace with the growth of industry since,” John Nester, an SEC spokesman, wrote in an e-mail. “As a result, you can’t divert resources to one program without detriment to another.”
Mr. Nester’s comments have been echoed in the past by SEC Chairman Mary Schapiro, who has complained that the commission doesn’t have enough money to adequately police Wall Street or draft regulations required by the Dodd-Frank legislation.
But the SEC’s examination goals face big obstacles. With Republicans in control of the House and wielding significant influence in the Senate with 47 members, it is likely that the Obama administration budget will be significantly revised.
Although Democrats are generally sympathetic toward the SEC and the greatly expanded workload imposed on it by Dodd-Frank, Republicans are skeptical about the commission’s performance.
Despite partisan differences, the SEC received a $136 million funding increase in its fiscal 2012 budget — $86 million short of the Obama administration request.
The Financial Planning Coalition is making the rounds on Capitol Hill with a Boston Consulting Group report that it had commissioned showing that the OCIE could increase the number of times it examines an adviser from once every 11 years to once every four years with a $105 million annual increase in the division’s budget.
“You have existing infrastructure in place that just needs to be funded,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.
Most advisers would rather be reviewed by the SEC than an SRO.
“In any profession, there’s going to be a few bad apples, and you have to weed them out for the good of the profession,” said Christopher Cordaro, chief executive of RegentAtlantic Capital LLC.
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