Insights from the experts in investment fiduciary responsibility.

Fiduciary Links: Odds Raised Slightly SEC Will Knock on Your Door This Year

Posted by Duane Thompson on January 21, 2014

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>>>>According to an article in Investment News last week, the SEC’s examination arm – the Office of Compliance Inspections and Examinations – is ramping up its review of those registered investment advisory firms that have not been inspected in the last three or more years. The agency has recently estimated some 40 percent of its 11,000 RIA firms have never been the subject of a compliance audit.

In past years OCIE has typically focused on higher risk RIAs – those with custody or the larger complexes that pose more risk to the markets. The vast majority of adviser firms registered with the Commission, however, have 10 or fewer non-clerical employees.

Over the next two years, OCIE plans to inspect 1,000 of these rarely or never-inspected RIA firms. In recent years, the SEC has inspected roughly 9 percent of all firms annually.

The good news out of this? The new, more focused inspections will take far less time than the more comprehensive reviews of an advisor’s books and records, looking at what the agency calls high-risk areas involving marketing, portfolio management, conflicts of interest, safety of client assets and how a firm values those assets. Ostensibly, the SEC is probably more concerned with the valuation of hedge fund assets by their fund advisors, than the more liquid and publicly traded assets managed by retail advisers.

Some compliance experts estimate a typical full audit could take up to six weeks while the more streamlined exams could end in less than two weeks, particularly for smaller firms.

Based on some simple math, we can boil down the odds of a never-audited firm being visited by the SEC in either 2014 or 2015 as a 1 in 9 chance. This is based on the pool of 4,400 advisory firms that have never been inspected, and the assumption that 500 will be visited each year, or 11.4 percent, over the next two years. Since the current examination cycle was already at 9 percent of all RIAs, or a 1 in 11 chance of being randomly selected for an audit, the odds for the ‘uninspected’ should only increase 1 or 2 percentage points in 2014-15. Since Congress rejected the SEC’s 2014 budget request for 250 more examiners to add to the current 400 at OCIE, as much as the Commission tries to leverage its resources in the end it cannot exceed its current cycle without more boots on the ground.

Politically speaking, the new SEC targeted program may also satisfy House critics who have called on SEC Chairman Mary Jo White to pay more attention to the advisers who have never been audited, rather than the recently registered private fund advisers. The Dodd-Frank reform act required registration of several thousand new private fund advisers, placing smaller advisers even further under the SEC’s radar.

State-registered advisory firms do not have comparable inspection cycles. Some states have more aggressive audit cycles than the SEC and others less, depending on resources and other priorities.

Now on to the rest of the week’s best links:

News and columns from the leading trade, consumer, and mainstream media:

From the organizations/associations/government/academia:

  • CEFEX certifies Securian Retirement of St. Paul, Minnesota. Read the press release. [CEFEX]

From the blogs:

Articles your clients are reading (or should be):

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