Cash-strapped SEC to streamline exams for some RIAs

Narrowly focused audits will be used for 1,000 advisers registered for more than three years but never examined

Jan 15, 2014 @ 12:12 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission is streamlining its examination process for a group of about 1,000 advisers that have been registered for three years or more but never audited before.

The initiative, which comes against the backdrop of a budget crunch for the SEC, is the same type of narrowly focused exams the regulator starting using in 2012 when it began overseeing private funds, according to Jane Jarcho, the commission's national associate for investment adviser and investment company examinations.

The onsite exams home in on specific high-risk areas — such as marketing, portfolio management, conflicts of interest, safety of client assets and valuation — rather than a comprehensive review of the firm.

The SEC has been able to reduce the examination period to about 75 days, from 150.

The SEC will implement the streamlined exams for traditional advisers to try and conserve exam resources and whittle down its exam backlog: approximately 40% of the nearly 11,000 registered investment advisers it regulates have never been examined, according to Ms. Jarcho.

“We brought some efficiencies into the examination process that would allow us to take a bite out of that population,” she said.

The SEC highlighted never-before-examined advisers on its 2014 priorities list, which was released last week. The agency hopes to examine about half of the 1,000 targeted advisers over the next two years.

The effort comes as Congress is about to

approve a budget for fiscal 2014 that gives the SEC only $29 million of the $353 million funding increase that it sought, bringing the commission's total budget to $1.35 billion.

SEC Chairman Mary Jo White has made a priority of hiring 250 more investment-adviser examiners to augment the approximately 400 now working in the Office of Compliance Inspections and Examinations.

In a statement on Tuesday, the SEC said that its funding level for fiscal 2014 would “limit our ability to bolster our enforcement and examinations programs.”

While the SEC tries to get more money out of Congress, it is trying to put examiners in front of more advisers, even if they can't do full audits.

“We believe there's value in that exchange. It promotes compliance,” Ms. Jarcho said. "[It is] an attempt to reach out to more registrants even though we know our focus isn't as comprehensive as it would be if we had more resources,” she said.

The Investment Adviser Association has been encouraging the SEC to use the streamlined exams for registered investment adviser reviews.

“Given that OCIE is unlikely to get new resources, it is essential that they focus on increasing their productivity,” said Neil Simon, IAA vice president for government relations. “This initiative suggests that they will be able to increase their incidence of adviser examinations.”

One observer said that the SEC is listening to signals from Capitol Hill, where some Republicans have questioned whether it is paying too much attention to private-fund advisers who have registered as a result of a directive in the financial reform law.

“They are responding to political pressure from the Hill to look at the larger population of advisers who have never been examined,” said Duane Thompson, senior policy analyst at Fi360 Inc., a fiduciary-duty consulting firm.

But no matter how efficiently the SEC uses its resources, it can't overcome its budget shortfall, according to Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.

“Any effort the SEC can make to target its limited resources is important, but it's not going to fill the funding gap to increase the examinations of investment advisers to an appropriate level to protect investors,” she said.

The CFP Board, IAA and other groups are advocating for legislation introduced in the House that would allow the SEC to charge advisers user fees to fund examinations.


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