Periodic Exams Coming to an Investment Adviser Near You (Probably)

June 3, 2013

The Bernie Madoff scandal exposed a lot of people and institutions.  One of those, obviously, was the SEC, and it has been working hard to live that fiasco down ever since.  But one aspect of the current securities enforcement regime that hasn’t quite been fixed is the (in)frequency of regular examinations of U.S. investment advisers.  In 2012 the SEC examined only eight percent of the investment advisers registered with the Commission.  At that rate, each one will get a periodic exam less than once every 12 years.  If part of the plan to stop fraud at investment advisers is to open their books regularly before it happens, the plan isn’t working.

I suspect that’s going to change soon, for two reasons.

Mary Jo White

On May 16th, the SEC’s new chair, Mary Jo White, told the House Financial Services Committee that the agency’s top priority is to increase the number of investment adviser examinations it handles every year.   As she testified, “Significant additional coverage is essential if investors are to be appropriately protected.”  Interestingly to me, she says the SEC does not especially care if that coverage comes from increased SEC staff or the responsibility is delegated to a self-regulatory organization – an expanded FINRA or a new SRO entirely.  Still, if Congress approves the SEC’s proposed $1.67 billion budget, part of that 27 percent funding increase would be used to hire 250 new staff to examine investment advisers.


Also, on May 20th, the North American Securities Administrators Association issued a report detailing the “IA Switch” – the transfer of registration responsibility for advisers with under $100 million under management from the SEC to the states.  All told, more than 2,100 investment advisers that were previously registered with the SEC are now registered with the states.  Today, over 17,000 advisers with roughly $270 billion in assets under management are now under state authority, with state examinations to follow.  I hope they’re ready, and at least to read the big talk in this report they seem to be.  The various state securities chiefs quoted in the report are essentially saying, “Bring it on.”  Wisconsin Securities Administrator Patty Struck, for example, said, “For investors to have better protection, we knew the states would have to oversee more advisers.  Our objective was to take on more IAs so the SEC would find it more manageable.”

Of course, they’ll be praying to the god of poorly funded regulators when the next Madoff happens on their watch, but for now state oversight may be a partial solution.

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