The Securities and Exchange Commission has started targeting investment advisers who have lied on their registration forms.
The crackdown is part of an effort to address malfeasance before it grows into a larger investor protection threat.
The SEC has begun reviewing registration documents to find financial advisers who have not accurately portrayed their education, assets under management and other aspects of their firm, Robert Khuzami, director of the commission's Division of Enforcement, said last week.
“If they come face to face with inspectors early on ... they're going to know that we're watching, and they're going to be unlikely to graduate to larger frauds,” he said at a hearing of the Senate Banking Subcommittee on Securities, Insurance and Investment.
The scope of the SEC crackdown on advisers who file misleading forms is unclear.
“I'm not sure of the particular numbers,” Mr. Khuzami told reporters after the hearing.
“This is a recent initiative. We selected firms on the basis of those that have not been subject to examination for some period of time,” Mr. Khuzami said.
That would give the SEC a fairly large pool from which to choose.
Carlo di Florio, director of the agency's Office of Compliance Inspections and Examinations, testified that the SEC examined just 8% of the nearly 12,000 investment advisers registered with the commission in fiscal 2011, which ended Sept. 30.
In addition, about 38% of advisers have never been subjected to an SEC review.
The examination program has a staff of a little less than 900 nationwide, while the SEC regulates about 25,000 registrants overall, Mr. di Florio said.
That works out to a ratio of one examination per 30 registered entities.
The ratio at the
Financial Industry Regulatory Authority Inc. is 1-to-5.
For bank regulators, it is about 1-to-1.
Under the Dodd-Frank financial reform law, about 3,200 investment advisers with assets under management of less than $100 million will switch to state registration. At the same time, the SEC will take on oversight of about 750 private-fund advisers in order to monitor systemic risk in the financial markets better.
“While the staff expects the number of registered advisers to decrease overall by 28%, the total assets managed by advisers registered with the commission are expected to rise,” Eileen Rominger, director of the Division of Investment Management, said in prepared testimony.
Mr. di Florio and his colleagues — the hearing featured five SEC division heads — said that the commission needs more funding to carry out its market-monitoring and investor protection missions while also implementing the massive Dodd-Frank measure. Many Capitol Hill Republicans have resisted such pleas, while at the same time criticizing the agency for failing to detect Bernard
Madoff's Ponzi scheme, which bilked investors out of $50 billion.
Sen. Jack Reed, D-R.I., chairman of the Senate Banking securities subcommittee, also rebuked the agency for its effort on Mr. Madoff.
“The agency failed to stop Bernard Madoff's long-running investment fraud despite repeated warnings,” Mr. Reed said in his opening statement. “It failed to ask the right questions and failed to take the right steps.”
Mr. Khuzami said that the SEC has undergone dramatic reform that has resulted in a more productive, effective agency.
The SEC filed a record number of enforcement actions in fiscal year 2011, including the most ever against investment advisers, he said.
“Over the past two years, the enforcement division carried out the most significant structural reforms of the enforcement program since 1972 — reforms designed to maximize resources and enable us to more effectively combat securities fraud,” Mr. Khuzami said in his prepared testimony.
Mr. Reed acknowledged that the SEC is trying to cope with increasingly complex and fast-moving markets.
“The SEC appears to be committed to reform,” he said.
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