SEC off to aggressive start in 2014, but can it follow through?

Alternatives, rollovers and misuse of advisory accounts – oh, my!

Feb 5, 2014 @ 12:01 am

By Mark Schoeff Jr.

sec, securities and exchange commission, regulation, mary jo white
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Is SEC chairman Mary Jo White pushing the regulatory envelope? (Bloomberg News)

The Securities and Exchange Commission's recent whirlwind of regulatory alarms prompts the question of whether it is biting off more than it can chew.

Last week, these included a risk alert on alternative investments, a warning on frequent rollovers and a daylong compliance seminar that covered the SEC's regulatory priorities ranging from the misuse of advisory accounts to custody and cybersecurity.

The SEC's activity last week came just weeks after it was stiffed by Congress on its budget request. It received just a $29 million increase in funding for fiscal 2014, bringing its budget up to $1.35 billion, or $324 million less than it originally said that it needed to hire an additional 250 investment adviser examiners.

Comparing the SEC's priority list to its resources raises questions about just how much the commission can juggle.

“Taken individually, each item is something they can do. But it doesn't feel as if they can do all of it,” said Daniel Nathan, a partner at Morrison & Foerster and a former SEC assistant director of enforcement.

“They're putting all their PR out front, and it will be a challenge to live up to it,” he said.

When the SEC issues examination priorities and risk alerts, the SEC is counting in part on moral suasion to increase its leverage. Sometimes that is called regulating by press release.

“The only thing active about this SEC is their public relations effort,” said Brian Hamburger, president of MarketCounsel, a compliance consulting firm.

“Over the last several years, there's been a huge gap between what the SEC says is important and where they choose to devote their resources,” he said. “Because of that gap, advisers are skeptical that the stated priorities are aligned with their actual priorities.”

The public relations blitz hasn't gone unnoticed.

“They're being more communicative about what they're focusing on,” said Christopher Cordaro, managing partner at RegentAtlantic Capital. “They're the regulator, and they're telling us what's important to them.”

Mr. Cordaro also wonders whether the SEC has the capacity to follow through.

“The SEC needs more resources,” he said.

“When they've got something to go after, they'll go after it. The question is whether they can go after everything,” Mr. Cordaro said.

In a speech last year, SEC Chairman Mary Jo White said that the commission will pursue even small regulatory violations in an effort to prevent them from growing into larger frauds.

During the SEC's national compliance conference last week, the head of the commission's exam program said that it wants advisers to know exactly where it will zero in on their operations.

“Our goal at the commission is to be as transparent as possible and share as much information as possible with you,” Andrew Bowden, director of the SEC Office of Compliance Inspections and Examinations, told hundreds of participants at the compliance seminar at SEC headquarters in Washington. “It shouldn't be a game of gotcha.”

The outreach comes with an implicit warning that firms won't get much margin of error in the highlighted areas.

The days of several warnings are over, according to Todd Cipperman, managing principal at Cipperman Compliance Services.

“The regulator is being very clear around certain areas they're not going to give [firms] a pass on,” he said. “Your leash is shorter.”

Whether the SEC follows through may hinge on how efficiently it targets high-risk areas, according to Amy Lynch, president of FrontLine Compliance.

“It's tough,” she said.

“It really depends on their technology. The key is how well those systems are being utilized,” Ms. Lynch said.

In a Jan. 27 speech in San Diego, Ms. White said that the SEC has developed what it calls a National Exam Analytics Tool that allows it to look for suspicious activity by analyzing “e massive amounts of trading data from firms in a fraction of the time it has taken in years past.”

In addition, she highlighted the Market Information Data Analytics System, which collects 1 billion records of trading data daily.

“This is not your father's SEC — or your mother's or even your older brother or sister's,” Ms. White said. “In this rapidly changing environment, we must stay on top of advances in technology.'

The SEC, which examines annually only about 8% of the nearly 11,000 registered advisers, is using risk analytics to target exams more precisely.

This year, it is starting to review about 1,000 advisers who have been registered for more than three years and were never examined.

Mr. Hamburger praised the SEC for streamlined exams that focus on the most important issues in order to do exams more quickly and efficiently and get out to more firms.

“They have made a dedicated effort to step up their office visits,” he said. “The rest of it has been more bark than bite.”

Even the bark may be enough to ensure that advisers heel.

“We operate our compliance like the SEC can show up any day,” Mr. Cordaro said. “Complying with the SEC is just good business.”


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