SEC examiners are using a new analysis tool that looks at 27 different areas of data from advisory firms, securities lawyer says.
Big data has fundamentally changed the compliance picture for financial advisers, according to a securities lawyer.
The Securities and Exchange Commission is examining much larger volumes of data from advisory firms and is able to use predictive analytics to identify warning signs of a likely violation, according to John Walsh, a partner with Sutherland, Asbill & Brennan, who was speaking at the Schwab Impact conference in Denver.
SEC examiners used to walk into an adviser's office armed only with a firm's Form ADVs. Today, examiners know a lot about the firm before they walk in the door.
"When the SEC comes into an adviser's office today, it's probably because someone said they saw signals that suggested they need to look at that firm," said Mr. Walsh, who spent 23 years at the SEC before moving to private practice.
Examiners typically will arrive with specific risks in mind and expect additional data to be provided quickly and in a clean format, he said. Around the country, SEC examiners are using a new data analysis tool that looks at 27 different areas of data from advisory firms.
The commission used to only look at small amounts of data — perhaps one day or one month of data. Today, that's jumped to three years' worth of information, Mr. Walsh said.
And regulators' use of data will only increase. Andrew Bowden, head of the SEC's National Investment Adviser/Investment Company Examinations Program, said recently he wants to "raise the bar" on how compliance uses data.
"Whatever size of your firm, you need to be thinking about big data," Mr. Walsh said.
The SEC also is bringing enforcement cases in situations that involve relatively small amounts of money, including one that required an adviser pay $702 in prejudgment interest.
Therefore, it would behoove advisers who may have a problem with a client to "consider making the client whole," he said.
"The real harm is the public enforcement case," Mr. Walsh reminded advisers.
Whistleblowers also are playing a bigger role today, with about 20% of firm examinations being inspired by tips, he said.
