RIA Growth Continues to Outpace SEC Exam Resources

Hester Peirce, a Republican, noted in her comments that “determining how best to deploy the Division of Examination’s never-enough resources is a yearly challenge.”

The SEC’s exam staff, she said, “is the face of the commission, and we need to figure out how best to support them in their work.”

Natasha Vij Greiner, deputy director of the SEC’s Division of Examinations, said at the meeting that the SEC plans to “significantly” increase onsite exams of advisors within the next six months, adding that this exam rate was “achieved despite continued growth” in the RIA industry.

“Going forward, as the industry continues to grow and change, maintaining our coverage ratio can only be achieved with sustained investments in human capital and technology resources,” Greiner said.

However, Amy Lynch, founder of FrontLine Compliance, told me that doing more onsite exams starting in April “will slow the process down, not speed it up. So the challenge will remain unless Congress provides more funding or the growth rate of advisors slows, which is highly unlikely, given the exodus from the sell side to the buy side.”

The SEC, Lynch added, “could also take different approaches to how exams are conducted. such as doing more limited-scope exams or targeted exams” to help boost the exam rate.

Greiner noted that challenges for the exam division include not only the growth in the RIA industry but also new products and risks.

Congressional Action Needed

In 2011, to help boost the SEC’s exam rate of advisors, Dodd-Frank raised the assets under management threshold for state regulation of investment advisors from $25 million to $100 million. As a result, 2,100 advisors switched to state registration.

Michael Canning, principal and founder of the LXR Group in Washington and a former director of government affairs at the North American Securities Administrators Association, told me that Congress will have to get involved again.

“It’s fair to say that if there is no way the [advisor exam rate] problem gets addressed without congressional involvement, and you don’t get congressional involvement on an issue this complex or this important to so many stakeholders unless you hold a few hearings.”

Options that have been on the table for increasing SEC exam frequency all require congressional action, Canning said.

Those options, Canning explained, include: lifting the cap for federal registration in Dodd-Frank so that states take on more responsibility; creating a self-regulatory organization (SRO) for RIAs; or authorizing the SEC to assess user fees to fund additional exams.

“In theory, the SEC could recognize an IA SRO under its existing authority, but no one I’ve ever spoken with inside or outside the agency believes it would take this step absent direction from Congress,” Canning added.

Unfortunately, Canning continued, “I don’t think we’ll get a sense for where this issue ranks in terms of House Financial Services Committee priorities for the year — including with respect to potential for hearings — until [SEC Chairman Gary] Gensler testifies for the first time before the newly reconstituted” committee.