Tighter SEC budget likely to keep RIA audits few and far between

Mar 6, 2017 @ 4:47 pm

By Jeff Benjamin

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The SEC's track record of auditing registered investment advisers on average only about once every 10 years isn't likely to change anytime soon.

Even though the commission reported a slight uptick in exams last year, to 11% of all RIAs, the trend in Washington toward reduced regulatory oversight will be amplified by Congressional Republicans who aim to tighten the purse strings on the SEC's $1.68 billion budget.

For some advisers who might naturally loathe the idea of a lengthy and possibly costly visit from SEC examiners, this might sound like good news. But there are also those who believe both the advice industry and investors benefit from increased regulatory oversight.

"I know they have a lot on their plate aside from adviser exams, and I think they've done a good job trying to squeeze in tighter oversight of advisers, but our point is that the broker-dealers are examined on average about every year by Finra, while RIAs are being examined every decade," said Skip Schweiss, managing director of advocacy at TD Ameritrade Institutional.

Mr. Schweiss acknowledged the sometimes "cross-eyed looks" he gets when he speaks to industry groups about TD's support for more frequent exams, something that seems to separate TD from many of its custodian competitors.

"We think for investor protection as well as for the reputation of the investment advisory industry the exams need to be more frequent," he said.

Even some financial advisers admit more frequent exams would benefit the advice industry.

"My view may be uncommon, but I would fully support (more frequent audits)," said David Ott, partner and chief investment officer at Acropolis Investment Management, a firm that was audited shortly after it opened in 2003 and then again 13 years later in 2016.

"Nobody likes the exam, but they were fair and reasonable both times, and I think the gap between the exams was too long," he added. "I'm not sure you want to get this radical ..., but I'd even support paying for all or part of the audit, within reason."

Be careful what you wish for, Mr. Ott.

If funding is the issue, as is often the debate, there isn't much hope for an increased audit schedule, at least under the current balance of power in Washington.

According to a Feb. 28 report from the House Financial Services Committee, which is now heading to the House budget committee, the SEC's current budget is up nearly 57% since the passage of the 2010 Dodd-Frank Act, and it's up 90% from a decade ago.

Since 2000, the report continued, the SEC's budget authority has increased by more than 345%.

Mr. Schweiss, who calculates that the SEC's budget has averaged an 8% average annual increase over the past two decades from when it was less than $500 million, gives the SEC credit for making the most of its resources. But he also believes the agency could to an even better job by streamlining their efforts.

"The 11% of the RIAs examined last year represented 30% of the industry's assets, so they are going after, in their eyes, the more complex firms," Mr. Schweiss said. "But we think the exams could be more efficient by focusing on things like the custody of client assets and the accuracy of performance reporting, instead of whether some form was properly filled out."

Leon LaBrecque, managing partner and chief executive officer at LJPR Financial Advisors, agrees that the SEC could go a long way toward speeding up the exams by better communicating with RIAs.

"We had an audit two years ago, and I think a more frequent audit schedule doesn't hurt, but better communications from the SEC would be helpful," he said. "The SEC might consider providing some guidance on best practices that could give compliant firms the ability to manage their procedures to best serve and protect clients. Right now, the industry has an array of consultants and workshops indicating SEC direction."

An SEC spokesperson declined to comment for this story.


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