The SEC's head of inspections cautioned an audience of compliance professionals not to misread the 10% annual examination rate for investment advisers. He said that doesn't mean the Securities and Exchange Commission only reviews 10% of advisers every year.
Marc Wyatt, director of the SEC's Office of Compliance, Inspections and Examinations, and a former
hedge fund portfolio manager, said that supposition would be the equivalent of assuming a $2 billion equity long-short fund with 100 positions only reviewed those stocks before selecting them. Instead, the manager is assessing a wide cross-section of the market.
In the same way, OCIE analyzes data from registration forms and other sources to target advisers that merit an examination.
“We're looking at the risks … trying to determine which firms, which funds, which business activities represent the highest risk to investors,” Mr. Wyatt said at the IA Watch compliance conference in Washington on Thursday. “We want to dedicate our time and limited resources at those firms.”
The director also said if the SEC allows private firms and other organizations to examine investment advisers to boost the numbers, that doesn't mean it'll put itself out of a job.
The agency is drafting a rule that would allow third parties to conduct examinations. The move comes as a response to investor protection concerns related to the fact that the SEC examines annually about 10% of the more than 12,000 investment advisers it oversees.
Last week, SEC Chairman Mary Jo White said she is
working to build support among fellow SEC members for the rule. When such a measure comes to fruition, it would not obviate the need for the agency's OCIE, according to the official who runs the operation.
“Any third-party examinations will be to supplement, rather than supplant, the work that OCIE does,” Mr. Wyatt said. “If there's additional support we can get to increase our ability to do thorough, risk-based examinations, we welcome that.”
But a former SEC official is wary of putting private firms in charge of exams.
Norm Champ, former director of the SEC Division of Investment Management, said it would be difficult for the SEC to regulate the examiners, which could become monopolies with their own policy objectives. He likened the potential problem to what he called weaknesses of credit rating agencies.
“I'm concerned about turning that power over to unaccountable third parties that may pursue their own agendas that might not be investor protection agendas,” Mr. Champ, who is now at the law firm Kirkland & Ellis, said during a separate conference panel.
It's unclear how quickly the SEC, which currently is
missing two of its five members, could move on a third-party examination rule.
“It's extremely unlikely it could be adopted this year,” Mr. Champ said.
Another initiative to increase exam coverage was launched this year. The agency is trying to
increase its investment adviser examination staff from 530 to 630 by the end of September. The gains will be achieved by shifting some broker-dealer examiners to the investment adviser side of OCIE and by hiring new examiners.
The transition is already underway.
“The feedback we've gotten so far from staff and stakeholders and everyone is very positive,” Mr. Wyatt said.
