After spending more than a decade guiding Legg Mason Inc. through the legal and compliance thicket, Andrew Bowden now sits across the table from his former colleagues.
Mr. Bowden, most recently executive director of Legg Mason Capital Management LLC and formerly its general counsel, joined the Securities and Exchange Commission four months ago as associate director for investment adviser and investment company examinations. He oversees 450 lawyers, accountants and examiners trained to look for securities violations.
Considering his insider's experience, the SEC expects Mr. Bowden to have new ideas about the types of irregularities that might be found at investment management firms — and how to spot them.
His boss, Office of Compliance Inspections and Examinations Director Carlo di Florio, said that Mr. Bowden's industry experience also will help identify “where there needs to be some critical improvements” in financial adviser examinations.
Mr. di Florio has charged Mr. Bowden with carrying out the risk-based approach to examining advisers that the SEC developed last year after an internal assessment recommended changes.
“There are definitely advantages coming to the job with the insight of having actually worked in the industry for 17 years, having been a registrant and having been examined,” Mr. Bowden said.
He said he experienced several SEC exams during his tenure at Legg Mason.
Mr. Bowden takes over the investment adviser examination program at a time when most conversations about this SEC function involve the debate over whether it should be outsourced to the Financial Industry Regulatory Authority Inc. or another self-regulatory organization, as draft legislation from House Financial Services Committee Chairman Spencer Bachus, R-Ala., would mandate.
LIMITED RESOURCES
The SEC has been able to review only about 8% of registered advisers each year because of limited resources — and that was before new rules were put in place in 2011 that require hedge funds and other private funds to register with the commission.
President Barack Obama is asking Congress for a 2013 budget increase that would allow the SEC to hire 222 new examiners, a request that is expected to get a chilly reception, at least from Republicans.
Mr. Bowden confirmed that the SEC would like to examine “more registrants with more regularity.” For now, however, his unit is focused on identifying the advisers that pose the greatest threat to investors and then conducting exams that focus on the riskiest parts of those firms' business.
One change in the past year has been the work that examiners do before they step through the adviser's door. Mr. Bowden's staff collaborates with the SEC's risk assessment professionals to comb through information provided by the firms, industry data, news and other reports looking for what it considers “risky” profiles.
Those characteristics include complexity of the business, internal inconsistencies, doing business with affiliated entities and being an outlier compared with peers or compared with past performance, he said.
“We try to identify registrants that present more risk than others,” Mr. Bowden said. “We also look at size because the more money, the greater potential impact to investors.”
Decisions about which firms to examine also often involve discussions with SEC staff members at regional offices who may have examined the registrants before, he said.
IRRELEVANT QUESTIONS
Another change has been that examiners no longer ask every firm the same list of questions because that process wasted resources on low-risk issues or ones irrelevant to that particular business, Mr. Bowden said.
But the SEC's efficiency efforts don't end with its own staff. The commission expects advisory firms to make their boards and senior managers available to help examiners understand the complexities of a particular business. Sending in a company lawyer, who may not be well-versed on the business of the firm, isn't advised, Mr. Bowden said.
“Get the right people in the room at the outset to answer questions about the business,” he said.
The examinations unit also plans to provide additional compliance guidance to firms this year through an increasing number of risk alerts, such as its January alert on how advisers can use social media, and last week's directive that advisers and brokers need to look more closely for unauthorized trading in accounts.
“We are trying to communicate regularly with the industry about things we are concerned about,” Mr. Bowden said.
Harvey Pitt, who served as SEC chairman a decade ago, praised the examination program's focus on risk, which applies not just to investment advisers but to broker-dealers and other registrants.
He said the new direction “reflects a substantial improvement.”
Investment advisers generally agree they've seen some positive changes.
“Anecdotally, members who have been examined in the last year report examiners came in better prepared,” said David Tittsworth, executive director of the Investment Adviser Association. “They felt like there was a keener understanding by the SEC staff of their firms.”
Mr. Tittsworth said, however, that some members still feel as though examiners are focusing on elements that aren't a central focus of their businesses.
Duane Thompson, president of Potomac Strategies LLC and a former official at the Financial Planning Association, said a risk-based approach makes sense for an agency with limited resources.
“What they really need, if they are really going to improve their compliance program, is more bodies to conduct more exams,” Mr. Thompson said.
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