Published on: Feb 4th, 2016
The press and industry organizations are reporting that the U.S. Securities and Exchange Commission (“SEC”) is planning to add 100 new examiners to its Office of Compliance Inspections and Examinations (“OCIE”) investment adviser examination staff. According to reports, the 100 new examiners will include an undetermined number who are currently broker-dealer examiners who would move into the investment adviser examination division and be retrained. The Investment Adviser Association (“IAA”), a leading trade association representing SEC-registered investment advisers, says that the addition of these 100 examiners, together with the 70 who were hired in 2015, will result in an increase of 35% to about 630 examiners. As of the publication of this Regulatory Update, the SEC had not yet announced the plan publicly.
In the past ten years, the number of SEC-registered investment advisers has grown approximately 35%, from about 8,500 advisers managing $24 trillion in assets to nearly 12,000 advisers managing around $66.9 trillion. Approximately 37% of these advisers provide investment advice to around 29,000 private funds with gross assets of about $10.4 trillion. Legislative changes and complex new products and lines of business have also made the oversight process more complicated.
OCIE’s staff resources have not kept pace with that growth. Roughly 40% of all SEC-registered investment advisers have never been examined; if you exclude advisers that were registered within the past three years, the percentage is still approximately 20% of advisers. In the coming year, the SEC intends to continue to conduct focused-risk-based examinations of a portion of these advisers, use enhanced exam procedures and techniques, continue OCIE’s practice of verifying assets and safeguarding controls and target higher risk entities with an emphasis on tips, complaints and referrals. For further information on the SEC’s 2016 examination priorities, see Cordium’s recent Regulatory Update.
Hiring additional examiners to help increase the percentage of investment advisers being examined has been one of the SEC’s top priorities in recent years. According to SEC Chair Mary Jo White, OCIE’s recent rate of examining approximately 10% of all SEC-registered investment advisers “presents a high risk to the investing public.” The SEC has requested funding in its budget to increase the examination staff by 225 examiners. In her May 2015 Testimony on the FY2016 Budget Request, Chair White said that, once those examiners were fully on board and trained, she would anticipate an increase in the adviser exam coverage rate from 10% to 14%. OCIE had estimated that by FY 2016 there would be more than 25 advisers per examiner.
The SEC’s announcement today that Jane Jarcho has been named Deputy Director of OCIE is in line with the SEC’s focus on investment adviser examinations. Ms. Jarcho has been the National Director of OCIE’s Investment Adviser/Investment Company examination program since 2013 and will continue in that role. The press release notes that, under Ms. Jarcho’s leadership, investment adviser/investment company examinations increased more than 27%.
Third-party compliance reviews. Other solutions for increasing adviser exam coverage that have been under consideration have included charging user fees, setting up a separate self-regulatory organization for investment advisers, having FINRA be involved, and the use of third-party compliance reviews. In her November 2015 testimony about the SEC’s Agenda, Operations and FY 2017 Budget Request, Chair White said that she has directed the staff to prepare a recommendation to the SEC for proposed rules requiring third-party compliance reviews for registered investment advisers. As the IAA presents the possible proposal, the scope of these reviews is not yet clear – it could range from full SEC-type mock exams to more limited engagements in agreed-upon areas. There are a number of other issues that would have to be addressed, including applicable standards, frequency, qualification of the third parties, and the SEC’s oversight of those third parties. Cordium notes that Chair White and others from the SEC have emphasized that the goal of these reviews would be to improve advisers’ overall compliance; they would supplement, not replace, OCIE’s exams. It is expected that a proposed rule regarding third-party compliance reviews will come out in 2016; some are predicting that the proposal will be out before Q3 2016.
Broker-dealer exams. As background for the plan to have broker-dealer examiners transfer to the investment adviser program, Cordium notes that there are now approximately 4,500 registered broker-dealers (as opposed to nearly 12,000 SEC-registered investment advisers). The Financial Industry Regulatory Authority (“FINRA”) and the SEC together covered exams of 51% of all registered brokers, with FINRA reportedly doing 80% of the broker-dealer exams. The SEC will increase its reliance on FINRA for these exams.
Takeaway. Although the timing of any increase in investment adviser examiners is not yet known, the increase should lead to a higher percentage of SEC-registered investment advisers being examined. As discussed in a previous Regulatory Update, as best practice, firms should review their compliance policies, procedures and practices against OCIE’s 2016 Examination Priorities, in addition to any other areas currently covered in periodic assessments or annual reviews, and consider issues that have been the subject of OCIE’s National Exam Program’s recent Risk Alerts. Advisers are encouraged to review relevant publications on OCIE’s webpage and attend the SEC’s 2016 SEC Compliance Outreach Programs (co-sponsored by OICE, the Division of Investment Management and the Enforcement Division’s Asset Management Unit) which will be posted here.
Cordium will continue to monitor the SEC’s discussions of both OCIE’s investment adviser examiners and exam coverage as well as the anticipated proposed rule regarding third-party compliance reviews and will provide updates as appropriate.
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