Doing the math on RIA exams

Two promising developments in the push to boost the number of advisers examined by the SEC each year have taken shape in the last couple of weeks. But don't hold your breath for that knock on the door from an examiner just yet. The first is the SEC's plan to shift some of its broker-exam staff over to the registered investment adviser side and use some of the agency's 2016 budget increase to hire new examiners. This effort would result in an RIA-focused crew of 630, up from the current 530. Great, a 19% increase. More good news — at least in terms of raising the number of advisers examined each year — came last week in the form of a proposed 2017 budget hike. The SEC got a prospective funding increase of 11% in President Obama's new budget for the coming fiscal year. The president's goal is to double the agency's budget in five years. Let's assume the 2017 hike, if it occurs, would add another 100 examiners to the RIA effort. (The SEC's budget request said 102.) Now to the math. With the addition of about 100 new examiners, the SEC projected its rate of examinations for the 11,500 RIAs under its purview would increase from just over 10% to 12%. If we apply this same estimate for the 100 examiners it plans to add using internal shifting and use of the 2016 budget increase, we might see another 2 percentage point increase, to 14% of advisers being examined in a year.

EVERY TWO OR THREE YEARS

According to a person familiar with the SEC's goals on RIA exams who spoke with reporter Mark Schoeff last week, the agency would like to hit a pace of examining RIAs about every two or three years. Getting to 14% of them per year doesn't come close to making that possible. The point of this exercise is to accentuate the fact that to reach its goal, the SEC, without a doubt, will need to find other means to bolster its exam numbers. Stephen Luparello, director of the SEC Division of Trading and Markets, said at the Financial Services Institute's annual conference last month that the agency is exploring alternatives to ensure more advisers are examined each year, with one option being third-party audits. The SEC is drafting a rule on the matter, though questions remain about which third parties would be chosen and who would oversee them. But if the SEC wants to hit a higher mark — and soon — it'll need to get the lead out on such alternatives and not rely on budget increases and shifting staff around.