SEC director says assuming 10% of advisers are reviewed each year is wrong

Marc Wyatt, head of the agency's inspections arm, says his division analyzes data from many more to decide which to target

Feb 25, 2016 @ 1:30 pm

By Mark Schoeff Jr.

+ Zoom
(Getty Images)

The SEC's head of inspections cautioned an audience of compliance professionals not to misread the 10% annual examination rate for investment advisers. He said that doesn't mean the Securities and Exchange Commission only reviews 10% of advisers every year.

Marc Wyatt, director of the SEC's Office of Compliance, Inspections and Examinations, and a former hedge fund portfolio manager, said that supposition would be the equivalent of assuming a $2 billion equity long-short fund with 100 positions only reviewed those stocks before selecting them. Instead, the manager is assessing a wide cross-section of the market.

In the same way, OCIE analyzes data from registration forms and other sources to target advisers that merit an examination.

“We're looking at the risks … trying to determine which firms, which funds, which business activities represent the highest risk to investors,” Mr. Wyatt said at the IA Watch compliance conference in Washington on Thursday. “We want to dedicate our time and limited resources at those firms.”

The director also said if the SEC allows private firms and other organizations to examine investment advisers to boost the numbers, that doesn't mean it'll put itself out of a job.

The agency is drafting a rule that would allow third parties to conduct examinations. The move comes as a response to investor protection concerns related to the fact that the SEC examines annually about 10% of the more than 12,000 investment advisers it oversees.

Last week, SEC Chairman Mary Jo White said she is working to build support among fellow SEC members for the rule. When such a measure comes to fruition, it would not obviate the need for the agency's OCIE, according to the official who runs the operation.

“Any third-party examinations will be to supplement, rather than supplant, the work that OCIE does,” Mr. Wyatt said. “If there's additional support we can get to increase our ability to do thorough, risk-based examinations, we welcome that.”

But a former SEC official is wary of putting private firms in charge of exams.

Norm Champ, former director of the SEC Division of Investment Management, said it would be difficult for the SEC to regulate the examiners, which could become monopolies with their own policy objectives. He likened the potential problem to what he called weaknesses of credit rating agencies.

“I'm concerned about turning that power over to unaccountable third parties that may pursue their own agendas that might not be investor protection agendas,” Mr. Champ, who is now at the law firm Kirkland & Ellis, said during a separate conference panel.

It's unclear how quickly the SEC, which currently is missing two of its five members, could move on a third-party examination rule.

“It's extremely unlikely it could be adopted this year,” Mr. Champ said.

Another initiative to increase exam coverage was launched this year. The agency is trying to increase its investment adviser examination staff from 530 to 630 by the end of September. The gains will be achieved by shifting some broker-dealer examiners to the investment adviser side of OCIE and by hiring new examiners.

The transition is already underway.

“The feedback we've gotten so far from staff and stakeholders and everyone is very positive,” Mr. Wyatt said.


What do you think?

View comments

Recommended for you

Featured video


How eAdvisors embrace technology to succeed

What is an eAdvisor and how are they using technology. These advisers aren't just putting technology on the shelf, they are using it to push their business to the next level, according to Fidelity's Cassie Warrington.

Latest news & opinion

DOL Fiduciary Rule: What you need to know about Acosta's decision

Labor Secretary Alexander Acosta confirmed that the agency's fiduciary rule will become applicable on June 9. Find out what advisers and firms should know when it goes into effect.

Acosta declines to extend delay of DOL fiduciary rule

Labor Secretary finds no legal basis to delay implementation; rule to become applicable June 9

Phyllis Borzi says opponents of DOL fiduciary rule face uphill climb to further delay or dilute it

Former assistant Labor secretary who crafted the rule says President Trump won't be able to get rid of it simply because he doesn't like it.

Advisers go on the offensive, getting clients ready for the next market correction

Some proactive planners are spelling out for clients the impact of a 10% or 20% correction.

Shrinking talent pool puts strain on advisory firms

Attrition, cuts in training programs and new competition make it difficult to fill job openings


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print