SEC needs up to 2,000 — not 250 — new examiners for advice coverage

Chairman seeks funding boost from Congress that will likely fall short of her goal

Jun 24, 2013 @ 3:54 pm

By Mark Schoeff Jr.

Mary Jo White, chairman of the Securities and Exchange Commission, wants to add 250 more examiners to police investment advisers, but the agency needs up to 2,000 to boost its policing of the business significantly.

Adding 250 investment-adviser examiners — a priority of Ms. White as she goes before a Senate budget panel Tuesday — will only boost annual adviser coverage rate to about 16%. By contrast, the Financial Industry Regulatory Authority Inc. examines between 45% and 55% of the brokers under its aegis.

“Given the current ecology of the investment adviser community and the [SEC's] mandate, the [SEC] would probably need somewhere between 1,800 and 2,000 additional examiners,” said a source familiar with the situation, who asked not to be identified. Currently, there are about 400 adviser examiners who examine annually about 8% of the nearly 11,000 investment advisers registered with the agency.

The SEC's fiscal 2014 budget request is $1.647 billion, a 27% increase over fiscal 2013, which ends Sept. 30. On Tuesday, Ms. White will make her case for the added funds before the Senate Appropriations Subcommittee for Financial Services and General Government.

It's not likely that the SEC will get the entire budget it wants for the coming fiscal year, let alone one large enough to fund examiner hiring that is eight times the level the current request can provide.

The SEC is “always trying to be more efficient and to move faster and smarter,” the source said. “But in the absence of more resources, no one should expect a material difference in coverage.”

Even though the SEC examines only a small slice of advisers annually, it is employing quantitative and risk analytics to target exams on the firms that are most likely to have compliance problems, according to the source.

Applying quantitative discipline to the exam process requires regularly assessing reams of information about all registered advisers — even those who not being formally reviewed.

“People wrongly infer that if you're not being examined, nobody's got any eyes on you at all,” the source said.

Proponents of a self-regulatory organization for advisers often cite Capitol Hill's reluctance to boost the SEC budget significantly as a reason that Congress should authorize an SRO.

Legislation that would do just that died last year after strong resistance from investment advisers, who fear that Finra would become the adviser SRO. A similar bill has not been reintroduced this year.

The SEC is officially agnostic on the question of whether it needs the help of an SRO to regulate advisers.

“There needs to be more examination coverage of investment advisers,” Ms. White said May 16 after an appearance before the House Financial Services Committee. “The SEC's not taken a position on whether that should be through an SRO or additional funding for the SEC. I don't have a conclusion on that today.”

A measure introduced by Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee, would authorize the SEC to charge user fees to advisers to fund examinations. The bill, which has the strong backing of adviser lobbying organizations, is a long shot to pass the committee or the House, which are both run by Republicans.

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