SEC Wants to Add 225 Examiners Through 2016 Budget
The SEC is looking to beef up the division that oversees investment advisors and broker-dealers, and is asking Congress for funds that would enable it to hire 225 new examiners.
But even if the commission receives all the funding it is requesting -- by no means assured in the current political environment -- it would still only have the resources to visit a small portion of the RIA practices it regulates.
SEC examiners reviewed just 10% of RIAs in fiscal 2014 and around 40% of advisors have never been examined, the commission reports.
The commission identifies the hiring of additional examiners as a "top priority" for fiscal 2016, and says that those positions would be used "primarily to conduct additional examinations of investment advisers and other staff."
Of the 225 examiners the SEC hopes to add, 180 would focus on investment advisors and investment companies. That builds on the current year's appropriation, which provides for 105 new examiners, 72 of whom will focus on IAs and ICs.
Once hired and up to speed, those examiners would help the SEC's Office of Compliance Inspections and Examinations reach a projected mark of reviewing 14% of registered advisors each year, a substantial increase that's welcomed by advocates of stronger oversight, even if they'd like to see the commission blessed with still more resources.
'NOT A PROFOUND CHANGE'
"First, we're pleased that the administration and the SEC is according federal oversight of advisors the priority it deserves," says Neil Simon, vice president for government relations at the Investment Adviser Association. "Ten percent to 14% is significant -- it's a 40 % increase. However it's not a profound change. The problem of adequate federal oversight of advisors remains."
In total, the SEC submitted a budget request of $1.722 billion for fiscal 2016, up from the enacted 2015 level of $1.574 billion.
If the SEC achieves its hiring goal, it will bring the headcount at OCIE to 1,305, up from 1,080 positions that are budgeted for in fiscal 2015. At present, OCIE carries a staff of 975.
The Financial Planning Coalition, which like the IAA has been advocating for greater resources for the SEC, praises President Obama's budget for addressing what it calls the "persistent underfunding" of the commission. But, building on the $150 million increase the SEC received for current year, the 2016 budget request would still leave the agency underequipped to police the investment advisory industry.
"While Congress modestly increased the SEC's budget for 2015, the agency's funding remains woefully inadequate, impeding its oversight and examination of investment advisers," the FPC says in a statement. "We urge lawmakers to support greater investor protection by adequately funding the SEC."
In defending its budget request, the SEC frankly acknowledges the challenges it faces in overseeing advisors, beginning with the proliferation of the industry as a distinct sector within financial services.
Since 2001, the volume of RIAs' assets under management has soared 252%, climbing from $17 trillion to about $62 trillion in fiscal 2015, the SEC reports. The commission now oversees nearly 12,000 registered advisors.
The SEC also notes that the many advisory firms have grown larger and more complex in recent years. Oversight is further complicated by provisions of the Dodd-Frank Act that brought new classes of financial professionals under the SEC's purview, including hedge-fund, private-fund and municipal advisors.
OCIE projects that by 2016, there will be more than 25 advisors for every SEC examiner.
Efforts to address the shortfall in oversight of the advisory industry have foundered in Congress, though groups like the IAA and FPC continue to advocate for legislation that would create a new funding mechanism for exams in the form of user fees collected from registered entities. Simon says he is hopeful that a bipartisan bill will emerge in the Senate this year, though he acknowledges that moving such a bill through either chamber will be a steep climb.
An alternative proposal on the oversight question, which the IAA opposes, would have the SEC tap one or more self-regulatory organizations to help with advisor exams.
In the meantime, Simon says his organization "will be knocking on doors on the Hill" to support the SEC provisions in the budget.
The SEC's request would fund OCIE at just under $350 million, making the second biggest line item in the agency's proposed budget, behind only the enforcement division. That would make for a 15% increase over OCIE's funding in the enacted 2015 budget.
Though Simon is hopeful that Congress will move on the president's budget without undercutting the requested appropriation for the SEC, he is well aware that the final figure could be somewhat lower as lawmakers work through the proposal and pass a final bill.
"This budget request is significant, but Congress has a mind of fits own," Simon says. "So this signifies the administration's priorities, but it certainly does not mean that it's likely to be the budget that Congress ultimately adopts."