© 2020 Arizent. All rights reserved.

SEC advisor exam rates see sharp uptick

Register now

WASHINGTON — For years, industry observers have lamented the SEC's examination of only a small fraction of the ballooning ranks of investment advisors under its purview.

Now, the commission's efforts — including more targeted examinations, reassigning personnel, and heightened risk and data analysis — is boosting exam rates, according to Peter Driscoll, director of the Office of Compliance Inspections and Examinations.

Last year, the commissions examination rate for advisors spiked by 40%, Driscoll said at the annual SEC Speaks conference. But, the actual exam rates might be somewhat less impressive — the SEC examined 11% of advisors in 2016 and 15% in 2017. So far this year, the commission is on pace for a 20% examination rate, he said. And, while,the trend is going in a positive direction, the commission is eager to expand its coverage of the fast-growing RIA sector.

The improvement is due to an internal reorganization under which roughly 100 exam staffers transferred from the broker-dealer and market oversight units to the division that oversees investment advisors and investment companies, Driscoll said.

"It's worked better than we ever thought it would in terms of getting our coverage up in that space," Driscoll said of OCIE's reorganization.

Through a collaborative cross-agency process, staffers have generated risk alerts and exam initiatives focusing on areas like cybersecurity and retirement advice where they see the potential for significant investor harm. Examiners now arrive at a firm's office with a narrow and targeted set of priorities, a sharp contrast from OCIE's past approach of pouring through every aspect of a practice in an exam.

The independent firm has been an aggressive recruiter since its founding in 2013.
1h ago
The Justice Department filed two counts of wire fraud against the firm but agreed to defer prosecution under a three-year deal that requires the bank to report its remediation and compliance efforts to the government.
1h ago
The agency would have us take a step backward and limit the use of forward-looking datasets.
1h ago

"Gone are the days of these full-scope exams that we did in 2003, 2004," Driscoll said. "Now we're very focused in terms of one or two areas that we believe are high risk. And the goal is to focus on the high-risk areas and move quickly and get our coverage up, because we realize that's a huge risk for the investment public if we're not getting to a large number of IA firms."

OCIE's work is driven by market surveillance and data analysis, Driscoll said. In particular, examiners are eyeing firms that show a pattern of hiring registered representatives who have prior disciplinary records.

"In an era when firms are trying to grow — particularly the middle-market firms — to bring in as many reps as possible," Driscoll said, "we worry that they're taking on reps that may have been let go from another firm or may have had a disciplinary issue. So we track where those reps go."

"If we see firms gathering folks that have a lot of disclosures or have a prior action against them, that will lead us to focus on that particular firm as a high-risk firm," he added.

To avoid being viewed as a "gotcha regulator," first-time advisor examinations often end with a deficiency letter, which spells out the flaws examiners found in a firm's policies and procedures. Advisors should think of those letters as a to-do list, Driscoll said.

"We'll go back in to see if they've fixed certain findings that we've had," he said. "And if they don't fix those findings, or we feel that they haven't fixed them adequately, we'll often refer that recidivist conduct over to enforcement."

For reprint and licensing requests for this article, click here.