SEC Staff Delivers Study on Enhancing Investment Adviser Examinations to Congress
On January 19, 2011, the SEC staff delivered to Congress its Study on Enhancing Investment Adviser Examinations. The study is designed to fulfill a Dodd-Frank Act mandate that the SEC conduct a study to review and analyze the need for enhanced examination and enforcement resources for registered investment advisers. The study discusses (a) the general examination process for registered advisers, (b) the number and frequency of examinations of registered advisers over the last six years, (c) the impact of the Dodd-Frank Act on registered adviser examinations, particularly the Act’s provisions affecting adviser eligibility to register with the SEC, (d) options for addressing the SEC staff’s capacity constraints with respect to adviser examinations and (e) the staff’s recommendations. In broad terms, the study reports that the number of registered investment advisers (“RIAs”) and the assets that they manage have grown significantly over the past several years, while the number of staff in the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has declined over the same period. The SEC staff further reports that while the SEC’s resources and the number of OCIE staff may increase in the next several years, the number of OCIE staff is unlikely to keep pace with the growth of RIAs. Accordingly, the SEC staff believes that the SEC likely will not have sufficient capacity to conduct effective examinations of RIAs with adequate frequency and that the SEC’s RIA examination program needs an adequate source of stable funding. The SEC staff recommends that Congress consider the following three approaches in order to strengthen the RIA examination program:
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Authorize the SEC to impose user fees on RIAs to fund their examinations by OCIE;
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Authorize one or more SROs to examine, subject to SEC oversight, all RIAs; and
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Authorize FINRA to examine dually registered broker-dealers and RIAs for compliance with the Investment Advisers Act of 1940.
The study also analyses the ability of user fees and one or more SROs to augment the SEC’s efforts in overseeing RIAs and improve the frequency of RIA examinations. The study further analyzes alternatives to the current approach of examining dually registered broker‑dealers and RIAs and RIAs that are affiliated with a broker-dealer.
While the Commission has not officially expressed a view about the study, Commissioner Elisse Walter released a statement expressing her disappointment with the results of the study. In sum, she stated that she wanted to ensure that Congress is aware of the resource constraints under which the SEC and OCIE operate currently and will operate in the future as a result of, for example, unfunded mandates and various elements of the Dodd-Frank Act such as (i) the creation of additional classes of SEC registrants who must also be examined by the SEC and (ii) the increased complexity of the advisory organizations that will be registered with the SEC. Commissioner Walter also argued that the description and weighing of the alternatives outlined in the Study is not balanced or objective. She noted, in particular, that the SRO option was given short shrift.