Despite leaner budgets, SEC's Clayton anticipates a 5% increase in adviser exams next year

SEC chairman acknowledged that tighter budgets would require increased efficiencies to meet examination goals

Jun 27, 2017 @ 12:55 pm

By Jeff Benjamin

If Securities and Exchange Commission Chairman Jay Clayton has his way, registered investment advisers will see more oversight from auditors next year.

"Registered investment advisers now manage more than $70 trillion in assets, which is more than three times 2001 levels," according to his prepared comments at the Senate Appropriations subcommittee Tuesday morning.

Mr. Clayton mentioned the reassigning of approximately 100 staff in the current fiscal year in an effort to increase the number of RIA exams. For fiscal 2017, the SEC estimates it will examine 13% of the approximately 12,000 investment advisers registered with the agency. In fiscal 2016, the rate was 11%.

"The SEC is on track to deliver a 20% increase in the number of investment adviser examinations in the current fiscal year," according to the statement

Mr. Clayton also anticipates being able to increase exams by another 5% next year.

The remarks were part of Mr. Clayton's testimony on the agency's $1.6 billion budget request for the 2018 fiscal year, which begins in October. The level of funding is essentially unchanged from the current fiscal year.

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.

Mr. Clayton acknowledged that tighter budgets would require increased efficiencies at the SEC.

"I expect that for at least the next several years we will need to do more each year to increase the agency's examination coverage of investment advisers in light of continuing changes in the markets," the statement noted.

Duane Thompson, senior policy analyst for Fi360, described Mr. Clayton's efforts as overly optimistic, unless the SEC can "make those exams more efficient without cutting corners."

"Even if the SEC is able to incrementally increase the exam cycle next year, I still think it's going to be difficult to keep pace with the steady growth of adviser registrations and assets under management while cutting the budget at the same time," Mr. Thompson said.

Regarding Mr. Clayton's references to creating efficiencies and leveraging technology, Mr. Thompson said such efficiencies are the only way the SEC could step up its exam numbers.

"While all of this helps, at the end of the day the SEC is going to continue to play catch-up if it doesn't add boots on the ground to actually visit the physical offices of advisers and interview them in person," Mr. Thompson said.

Amy Lynch president of FrontLine Compliance, is more optimistic that the SEC can find a way to increase exams through efficiencies and technology.

"I think they're being smarter in how they select registrants for exams," she said. "I think they're doing their own internal risk assessments and matching that with various models to conduct different types of exams."

Ms. Lynch expects the number of exams to increase, but the audits will be more varied, to include more exams conducted without physically visiting the adviser's office.

"In my opinion, they can do it, if they do more work off-site," she said.

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