Securities and Exchange Commission examiners haven't slowed down during the dog days of summer, according to compliance consultants who attribute the uptick in the SEC exam pace to the agency's focus on registered investment advisers who have never been examined.
At the beginning of the year, the
SEC launched a program to target about 1,000 advisers who have been registered for three years or more without being audited. The agency hopes to examine about half of them over the next two years.
The SEC is off to a fast start, said Christopher Winn, managing principal at AdvisorAssist, a management consulting firm specializing in the investment advice sector.
“The exams have increased significantly,” Mr. Winn said. “They're really trying to live up to their public proclamation that they're going to increase the number of exams they're going to do in a particular year.”
Mr. Winn said about 30 of his clients have gone through the first-time exam. They start with phone interviews that cover core areas, such as custody, trading practices, clients and advertising. For advisers who don't seem to pose a particular risk, a short on-site exam follows.
“There are a lot of exams happening that are less than a full day, which is really bolstering the SEC's numbers,” Mr. Winn said.
Brian Hamburger, president and chief executive of MarketCounsel, a compliance consulting firm, also has seen a “significant pickup in SEC exams, particularly focused on never-before-examined advisers.”
The SEC reviews have been straightforward, Mr. Hamburger said, focusing on custody and other basics.
“They're pretty broad-based examinations — what we'd call getting-to-know-you examinations,” Mr. Hamburger said. “It's exactly what we'd expect the first time out.”
An SEC representative was not immediately available for comment.
One adviser who was examined for the first time this year after having been registered with the SEC since 2003 said his firm emerged unscathed from the review.
“They're very thorough,” said Matthew Tuttle, chief executive of Tuttle Tactical Management. “It was everything I expected, and I knew it was coming.”
But Mr. Tuttle was surprised by the time examiners spent on determining whether his firm could engage in insider trading. That was misguided, he said, because his firm has no ability to move stock prices.
The fact that the SEC has made
never-before-examined advisers a priority is good for compliance, Mr. Tuttle said.
“That's going to give [advisers] a kick in the pants,” he said. “Now that you know they're coming at some point, you're incentivized to get your act together.”
The initiative comes against the backdrop of a
budget crunch for the SEC, which probably won't get its full funding request from Congress again this year. The agency said it needs a budget boost to hire about 240 more investment-adviser examiners.
There are about 11,000 investment advisers and — given that the agency can examine only about 9% a year — about 40% of the total have never been examined. The streamlined exams in the never-been-examined program are designed to conserve resources while expanding coverage.
Mr. Hamburger said the SEC is misguided in targeting advisers who have never been examined because many of them, especially those who don't have custody of their clients' assets, are not likely to harm clients.
“There are advisers they know are engaged in far more risky behavior and practices,” Mr. Hamburger said. “More [exams] isn't really, in my opinion, the way we're going to cure this problem over the long term.”
The SEC still has far to go to reach all the advisers who have never been examined.
“They're just starting to put a dent in it,” Mr. Winn said. “We'll continue to see a high level of momentum this year and into next year.”
