As Regulators Prepare to Conduct More Examinations, Registered Investment Advisers Should Make Sure They are Prepared

May 29, 2013

Reading time : 5 minutes

Registered investment advisers must make sure that they have strong compliance programs in place and they are prepared for regulatory examinations as regulators expect to increase the number of examinations being conducted.  In recent testimony before the U.S. House of Representatives Committee on Financial Services, Chairman Mary Jo White of the U.S. Securities and Exchange Commission (“SEC”) discussed some of the recent activities of the SEC.  The testimony addressed several key areas of SEC oversight and focus including the areas of SEC enforcement and the SEC’s inspection and examination program.  During the testimony, Chairman White stated, “the [SEC] needs to further strengthen the enforcement and examination functions of the SEC.  Strong enforcement of the securities laws is necessary for investor confidence and is essential to the integrity of our financial markets.  Successful enforcement actions result in sanctions that deter and punish wrongdoing and protect investors, both now and in the future.  Similarly, our National Examination Program is critical to improving compliance by regulated entities, preventing and detecting fraud, and monitoring market risks.”

Specific to investment advisers, Chairman White stated that in fiscal year 2012, the SEC conducted examinations of approximately 974 investment advisers and filed 147 actions against registered investment advisers, the most ever seen in a single fiscal year. Many of the actions filed resulted from risk-based investigations that helped to identify misconduct early so that timely actions can be taken to minimize investor loss.  Additionally, multiple actions were due to an SEC initiative to identify registered investment advisers lacking effective compliance programs.

In Chairman White’s Testimony on SEC Budget on May 7, 2013, she indicated that one of her key priorities is “further strengthening the core enforcement and examination functions of the SEC.”  The SEC is requesting $1.674 billion for fiscal year 2014 and it was indicated that one thing the budget request would address is additional funding for “expanding oversight of investment advisers and improving their regulation and compliance….”  During fiscal year 2012, the SEC was only able to examine about eight percent of registered investment advisers and over forty percent of advisers have never been examined.  Chairman White indicated that, “under the [fiscal year] 2014 request, one of the SEC’s top priorities is to hire 250 additional examiners to increase the proportion of advisers examined each year, the rate of first-time examinations, and the examination coverage of investment advisers and newly registered private fund advisers.”

The North American Securities Administrators Association (“NASAA”) recently posted a report providing a detailed history of the investment adviser “switch” that took place for many investment advisers last year.  The report provides a beginning to end summary of the switch and indicates that, “The regulatory transfer of more than 2,100 investment advisers from a federal to state oversight, commonly known as the IA Switch, was one of the most significant achievements in the history of [NASAA].”  It provides an overview of the state securities regulators’ fight in the years leading up to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act to take back some of the regulatory authority lost with The National Securities Market Improvement Act of 1996 that divided the regulation of investment advisers between the SEC and the state securities authorities.  The report indicates that the state securities regulators were concerned about the SEC’s low examination rate of investment advisers even before the financial crisis of 2008, which highlighted the need for financial reform and the Madoff fraud discovered at the end of 2008 that helped to raise concerns about the SEC’s low examination rate.

In the report it states that, “States have robust and dynamic regulatory oversight programs….state securities regulators use a variety of tools to monitor on-going compliance with applicable laws and regulations.  These include, but are not limited to, desk or remote audits, routine on-site exams and ‘for-cause’ exams….”  Part of the preparation for the switch process included NASAA and the state securities regulators working together to ensure that state examiners would be prepared to examine investment advisers.  State securities regulators had begun examining investment advisers that switched from SEC to state registration before the switch process was even completed.  The report indicates that preparations for examining investment advisers switching from SEC to state registration began in 2011.

By now the message should be coming across loud and clear to investment advisers – it is not a matter of if the investment adviser will be examined, it is simply a matter of when. Registered investment advisers need to be proactive in making sure they are prepared for regulatory examinations. Preparing for examinations and conducting annual reviews of an investment adviser’s compliance program can and should be included in every investment adviser’s compliance budget.  For some investment advisers preparing for a regulatory examination may include hiring an outside consultant to conduct a review of the investment adviser’s compliance program or to conduct a mock regulatory review but for many investment advisers this just isn’t in their compliance budget. RIA Compliance Consultants has prepared a cost-effective tool, RIA Express – Compliance Review, to assist these investment advisers.  This online compliance tool helps guide your investment adviser firm through the process of reviewing the effectiveness of your investment adviser’s compliance program. RIA Express – Compliance Review takes you through a series of questions about your investment adviser’s disclosures, policies/procedures and actual practices. Based upon your answers, RIA Express – Compliance Review generates a written findings report and allows you to track the status of your corrective actions.  RIA Express – Compliance Review can be purchased for just $895. Click here to purchase the tool or for additional information or click here to request a demonstration.

Posted by Bryan Hill
Labels: Annual Review, Compliance Program, Compliance Training, Examination, Regulatory Exam, SEC, SEC Inspection