SEC enforcement down despite increase in exams
WASHINGTON — Even as SEC examiners visit a larger swath of registered investment advisors, they are bringing fewer enforcement actions against them, commission officials say.
Examination rates have been marching steadily upward, with examiners on pace to reach 20% more firms this year than last, but at the same time, the percentage of firms referred to the SEC's Enforcement Division has been dropping, now down to around 7% from around 10% in prior years, according to Peter Driscoll, director of the SEC’s Office of Compliance Inspections and Examinations.
The inverse trend traces back to a variety of changes at the commission, including the closer coordination between the enforcement and examination units, Driscoll and enforcement co-director Stephanie Avakian said at the Investment Adviser Association's annual compliance conference.
Advisors should not be surprised or panicked when enforcement staffers increasingly turn up at a firm early in the examination process, Avakian added.
"It's almost entirely circumstances where enforcement is trying to learn," she said. "[W]e learn a lot more by actually being there at the exam."
The SEC's Enforcement Division remains focused on what Avakian called "bread and butter" issues, clear-cut instances of investor fraud, blatant violations of the custody rule or undisclosed conflicts of interest, among others.
OCIE's recent pivot to more targeted, issue-focused exams, rather than top-to-bottom audits, can also help explain the decline in enforcement. Moreover, as examination rates climb, OCIE staffers have been able to penetrate more deeply into the ranks of RIAs, moving past the most immediate priorities of the highest-risk firms. As a result, examiners have been visiting firms with stronger compliance programs, Driscoll explained.
"As we hit more firms," he said, "we're getting to better firms."
OCIE is looking to find alternatives to enforcement referrals, Driscoll indicated, saying that his team tries to address many of the compliance issues they discover in advisor exams through deficiency letters, reserving enforcement for the most egregious offenders.
The SEC has also undertaken a novel initiative billed as an alternative to enforcement penalties that aims to clean up one of the most persistent areas of investor harm in the RIA space: selling clients mutual fund share classes with heavy fees when lower-cost share classes are available.
The commission is temporarily offering amnesty to firms that self-report the prior sale of high-cost share classes and refund the fees they collected to clients. To qualify for the reprieve, advisors must notify the SEC of their intention to self-report by June 12, 2018.
The initiative allows the SEC to return over payments to investors more effectively than it could have by bringing individual enforcement cases against bad actors, Avakian said. If that effort is successful, more self-reporting programs could follow, she added.
"In terms of whether we might see other things — in some ways I hope so," she said. "I hope we can find other areas, whether it's in the advisory space or elsewhere — but other areas where we can approach them in a broad way. Resources are limited and problems are many."