Advisers back SEC initiative on exams

Agency plans to go after RIAs who have never been subject to a formal review

Nov 1, 2013 @ 2:55 pm

By Mark Schoeff Jr.

securities and exchange commission, examinations, advisers, compliance, regulation
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A plan by the Securities and Exchange Commission to target those advisers who have never undergone compliance examination next year is drawing support from advisers, consultants and trade associations.

On Thursday in New York, SEC inspections chief Andrew Bowden told a meeting of the Regulatory Compliance Association Inc. that the regulator plans to make the approximately 4,400 advisers who have never faced an SEC exam a priority to a formal review in 2014. Of that number, Mr. Bowden said the agency will zero in on about half, 2,180, that have been registered for more than three years and are domiciled in the U.S.

“We favor the inspections,” said Martin Hopkins, president of Hopkins Investment Management, whose firm has undergone an SEC exam. “It holds you to a standard. It shows you how you could be doing things better. All of that is in the best interest of the investing public.”

Leighton Roper Jr., owner of Net Worth Advisory Services, is registered in Virginia and said that state securities regulators visit him every couple of years. His firm is too small to fall under the SEC's regulatory umbrella, but he's in favor of stepped up SEC exams.

“I don't mean to be vindictive about it, but if there's a regulatory responsibility, it should be performed,” Mr. Roper said. The SEC's examination record “means there are an awful lot of advisers who have yet to be challenged on the way they do business.”

An investment adviser trade association in Washington also welcomes the agency's focus on unexamined advisers.

“We have encouraged [the SEC], in very strong terms, to address this population of advisers,” said David Tittsworth, executive director of the Investment Adviser Association. “It's not helpful to us as a profession [for advisers to go without review]. We want the SEC to have a more robust and thorough examination program.”

Flying under the SEC's radar increases the chances that advisers have compliance weaknesses, according to Amy Lynch, president of FrontLine Compliance LLC.

“I really hope this is a wake-up call to the industry,” Ms. Lynch said. “There are way too many firms out there who think their compliance programs are just fine because they've never been examined. They've been playing a game of Russian roulette.”

The SEC is likely to zero in on areas such as custody, financial records, marketing, and trading and trade allocations, Ms. Lynch said.

The SEC has indicated that it has the resources to conduct annual examinations of only about 8% of the 11,000 registered advisers it oversees. It doesn't look as if it will get the budget increase it is requesting this year to add 250 investment adviser inspectors to its staff.

“They are now trying to find new ways to target their examination program so that they can get a more diverse base of registrants examined,” Ms. Lynch said.

Some of the reaction to Mr. Bowden's remarks was skeptical.

“Next year I'm going to lose 40 pounds, too,” said Brian S. Hamburger, president and chief executive officer of MarketCounsel, a regulatory consulting firm. “It's aspirational.”

Mr. Hamburger said it is an open question whether Mr. Bowden's office has the proper management and resources to fulfill its ambition, given that the office also devotes considerable resources to examining broker-dealers, who are also regulated by the Financial Industry Regulatory Authority Inc.

Trevor Hunnicutt contributed to this story.

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