SEC budget request could make it harder for agency to increase adviser examinations

The SEC budget request for 2018 projects 1,044 full-time OCIE employees, down from 1,069 in fiscal 2017

Jun 23, 2017 @ 2:17 pm

By Mark Schoeff Jr.

Securities and Exchange Commission Chairman Jay Clayton will go to Capitol Hill next week to ask lawmakers for a funding level that could make it more difficult for the agency to increase its examination of investment advisers.

Mr. Clayton is scheduled to testify on June 27 before a Senate Appropriations subcommittee, where he will testify on the agency's $1.6 billion budget request for fiscal 2018, which begins in October. That level of funding is essentially the same as the current fiscal 2017 budget.

The agency would reduce funding for the Office of Compliance Inspections and Examinations to about $341 million, a decrease from the current $346 million. The SEC budget projects 1,044 full-time OCIE employees, down from 1,069 in fiscal 2017. The agency has implemented a hiring freeze.

The SEC has been under pressure to boost its examination rate for advisers. Last October, the SEC increased the number of investment-adviser examiners by approximately 20%, in part by shifting examiners from the broker-dealer to investment-adviser side of OCIE and moving more broker exams to the Financial Industry Regulatory Authority Inc., the brokerage industry's self-regulator.

For fiscal 2017, the SEC estimates it will examine 13% of the approximately 12,000 investment advisers registered with the agency. It also estimates a 13% rate for fiscal 2018. In fiscal 2016, the rate was 11%.

Duane Thompson, senior policy analyst for Fi360, a fiduciary training and accreditation firm, said the SEC could be hitting a ceiling, given its budget request.

"It's going to make it extremely difficult to increase its current examination cycle for investment advisers," Mr. Thompson said. "I just don't see the needle moving much next year."

But a person familar with the SEC budget request, who asked not to be identified, pointed to the agency's estimate that it will increase investment advisers examinations to 1,850 in fiscal 2018 from the estimated 1,750 for fiscal 2017. The actual number of exams was 1,447 in fiscal 2016.

"Exams will go up, and we believe we will be able to vigorously pursue our mission across all our programs," the person said.

Earlier this year, the acting OCIE director, Peter Driscoll, said adviser exams were up 28% over the previous year. SEC Commissioner Michael Piwowar said increased SEC exam efficiency was obviating the need for a rule that would allow the SEC to tap private-sector examiners to boost its coverage rate.

Amy Lynch, president of FrontLine Compliance, said the SEC has the staff and technology it needs to expand its coverage of advisers.

"They're trying to do more with less," Ms. Lynch said. "They're being smarter about how they target firms for examinations."

But the flat SEC budget proposed by the Trump administration is a sharp contrast from the preliminary fiscal 2018 increase of $445 million sought by the Obama administration. In November testimony on Capitol Hill, former SEC Chairwoman Mary Jo White said increasing adviser exams was a top priority.

"The SEC under Republican administrations tends to ask for a lot less during the appropriations process than the SEC under Democratic administrations," Mr. Thompson said.

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