SEC takes steps to avoid Madoff sequel

Perhaps it was appropriate that the same week a two-part television series aired on the Bernie Madoff scandal, the Securities and Exchange Commission leaked a story that it was increasing the number of RIA examiners by 20%. After all, one of the saddest things about the Madoff Ponzi scheme is that it could have been detected if regulators had been doing their jobs, something the movie makes clear. While the SEC is to be congratulated on beefing up the number of staff examining registered investment advisers to 630 from 530, almost everyone agrees that another 100 examiners is just a drop in the bucket. As the numbers show, the SEC needs all the help it can get. In fiscal 2015, the agency conducted 1,221 exams, even though it is responsible for supervising about 11,500 RIAs. That number is expected to grow to 12,000 this year. The SEC has long since recognized that it falls short in the number of exams it conducts. It has whined about not getting enough money from Congress to hire more examiners, instead of reallocating the resources it has.

ADDITIONAL EXAMINERS

That is why it is encouraging to see the SEC take this latest step. Some of the 100 additional examiners are coming from within the agency and are currently conducting broker examinations. The agency feels, and we concur, that given the fact that the Financial Industry Regulatory Authority Inc. also conducts broker exams, it can spare these staffers to help out on the RIA side. The SEC should not think the problem is solved, however. It has been working on a proposal to allow third-party contractors to conduct RIA exams, and it should continue with all due haste. Finally, the SEC must find a way to increase the productivity of its examiners. Right now, they are only conducting about three exams each a year. Assuming they are working to capacity, the exam process must be reviewed and revamped. Not doing so only increases the odds that the next Bernie Madoff will go undetected as well.