SEC Prioritizing Investment Adviser Compliance

As the number of registered investment advisers continues to increase, the SEC is stepping up its scrutiny of this fast growing class of investment professionals. As a result, in FY 2016, the office of compliance inspections and examinations (OCIE) redeployed a significant number of their existing examination staff to bolster the number of staff in the investment adviser examination program. In doing so, the agency has already increased the size of its staff by roughly 20%. But that’s not the only step the SEC has taken recently to prioritize investment adviser compliance.


Exams of investment advisory firms are only increasing. In 2016, the OCIE conducted more than 2400 exams of regulated entities, which is an increase of more than 20% over FY 2015 and the highest number of examinations in the preceding seven fiscal years. Of those 2400 exams, nearly 1,450 were examinations of investment advisers, representing more exams than the OCIE had completed of investment advisers in any of the prior seven fiscal years and almost 20% more investment adviser exams than it completed in FY 2015. This reflected a coverage ratio of approximately 11% of the number of registered investment advisers. This same trend is taking place in 2017, as well. According to SEC Chairman, Jay Clayton, the agency will increase its examinations of investment advisers by 20% in the current fiscal year, with a 5% increase anticipated in 2018.


Beyond examinations, the OCIE has continued to spend a considerable amount of time and effort on enhancing its risk assessment and surveillance capabilities.  As part of these efforts, the staff has spent significant resources to develop technological tools that allow them to collect and analyze data filed by registrants, not just those that are chosen for examination.


As a means of improving and promoting compliance, the OCIE has increasingly added outreach events as a way to educate and engage with the industry. In 2017, the OCIE held regional seminars in Portland, New York, Boston and Chicago and, in 2016, a national seminar at the SEC headquarters in Washington, DC. During these outreach programs, staff discuss examination procedures, the examination selection processes, recent trends in examinations and key examination program initiatives, which typically represent the areas of heightened risk it is concentrating its resources on addressing.


One particular vehicle for transparency that OCIE staff has increasingly used to inform the industry about compliance issues related to investment advisers is its use of Risk Alerts. This year, OCIE staff has published four risk alerts including a risk alert on compliance with the Advertising Rule, a risk alert on the top five most commonly-cited deficiencies, and two risk alerts on cybersecurity. The SEC believes these types of detailed risk alerts about common compliance issues and observations not only help investors, but also firms’ compliance operations.

The SEC’s enforcement program is highly focused on investment advisers for an obvious reason: they manage more than $70 trillion in assets for approximately 30 million clients. In fact, more than 50% of the SEC’s requested funding for 2018 will be invested in the agency’s enforcement and examination programs. This budget will predominately support increased coverage of investment advisers. For firms, this translates to additional scrutiny of their compliance programs.

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