Category: Alerts

Alaric Compliance Alert: New SEC Chair States Increasing Examinations is a Priority

The new Securities and Exchange Commission (“SEC”) Chairman Jay Clayton testified before Congress that the agency will increase its examinations of investment advisors by 20% in the current fiscal year, and nudge the numbers up a further 5% in fiscal 2018, despite requesting a slightly lower budget than in the current year. More than 50% of the requested budget funding will be invested in the agency’s enforcement and examination programs.1

This budget will support the SEC’s effort to place a high priority on adding more examiners as part of the agency’s multi-year plan to increase coverage of investment advisors. This mirrors the former SEC Chairwoman Mary Jo White’s November 2016 testimony in which she stated increasing advisor exams was a top priority in the SEC’s FY 2018 preliminary budget request.2

An increase in exam coverage is necessary as registered investment advisors (“RIAs”) now manage more than $70 trillion in assets, more than three times 2001 levels. To keep pace, the SEC reassigned approximately 100 staff in 2016 to the investment advisor examination unit of its National Examination Program from the Financial Regulatory Authority (“FINRA”).

To increase exam coverage, the agency will continue to enhance its internal operations efforts, and leverage technology to increase efficiency. The SEC plans to continue conducting so-called risk-based presence exams, which enable the SEC staff to draw on data mining, analytics and pattern recognition to focus their time and resources on the areas that represent the biggest risks to investors.3

Indeed, the regulator is assembling massive data inputs, including Form ADV and Form PF filings, into a risk matrix, with the goal of examining every RIA at least once every five years. “It’s an ambitious goal that increases the likelihood an advisory firm will get a knock on the door sooner or later,” observes Robert Plaze, Partner with the law firm Proskauer and former Deputy Director of the Division of Investment Management during his nearly 30-year tenure at the SEC. “Because the SEC has further focused some part of its resources on advisors that haven’t been examined before, those that have never had the pleasure can soon expect to join the company of those who have.”

Depending upon risk weightings, exams may be more or less intensive. “The good news is that many of the examinations these days are focused on a limited number of issues,” adds Plaze, “and can be over in a relatively short amount of time. Some of our client’s on-site exams have been finished in a week.”

Even with funding for the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) remaining relatively unchanged from FY 2017,4 many industry experts foresee little change in the aggressiveness of SEC enforcement — certainly not the deregulatory watershed some had predicted. Many anticipate the continued trend from FY 2016, during which the agency brought a record 548 standalone or independent enforcement actions and obtained judgments and orders totaling more than $4 billion in disgorgement and penalties. The SEC also reached new highs for Foreign Corrupt Practices Act-related enforcement actions (21) and money distributed to whistleblowers ($57 million) in a single year.5

In actuality, the planned increase in exam frequency represents a seismic shift from years past, when advisors could expect a review about once every five to 10 years; and some registrants escaped review altogether. Examining 10% or less of the total number of RIA’s prior to 2016 was generally viewed by the SEC and the industry alike as insufficient toward the end of protecting investors and maintaining fair, orderly, and efficient markets.

In light of the potentially increased exam frequency, engaging compliance expertise will be essential for developing and maintaining proper controls, and for reviewing a firm’s compliance policies and procedures on at least an annual basis. For instance, although the Commission’s rule6 proposed last year requiring third-party compliance reviews for RIAs was never adopted, a compliance consultant can provide valuable objective guidance and independent feedback to help a firm survive a regulatory review. “A good, well-supported CCO will have prepared his or her organization for an SEC exam, making sure its house is in order before the occasion,” Plaze concludes.


1 http://www.investmentnews.com/article/20170627/FREE/170629933/despite-leaner-budgets-secs-clayton-anticipates-a-5-increase-in
https://www.appropriations.senate.gov/imo/media/doc/062717-Clayton-SEC-Testimony.pdf
2 https://www.sec.gov/news/testimony/white-testimony-sec-agenda-fy2018-budget-request.html
3 https://www.sec.gov/news/speech/inside-the-national-exam-program-in-2016.html
4 http://www.investmentnews.com/article/20170627/FREE/170629933/despite-leaner-budgets-secs-clayton-anticipates-a-5-increase-in
5 https://www.sec.gov/news/pressrelease/2016-212.html
6 https://www.sec.gov/news/testimony/chair-white-testimony-sec-agenda-operations-2017-budget.html
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