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SEC Staff Concludes Insufficient Capacity to Examine Investment Advisers

By | January 19, 2011

The SEC has released a staff study on enhancing investment adviser examinations required by Section 914 of the Dodd-Frank Act.  The Office of Compliance Inspections and Examinations, or OCIE, currently examines registered investment advisers.

The SEC staff’s conclusions are set forth in Part V of the study.  The staff notes the number and frequency of examinations of registered investment advisers have declined over the past six years.  This can be explained, in part, by substantial growth in the number of registered investment advisers and a decrease in the number of OCIE staff.  The staff expects that the frequency of examinations of registered investment advisers could increase following the effective date of Title IV of the Dodd-Frank Act as a result of a substantial decrease in the number of registered investment advisers, many of whom will transition from federal to state registration.  The amount of any potential increase in examinations, however, may be offset by the need to divert examination resources to fulfill new examination obligations that the SEC was given by the Dodd-Frank Act.

Although the number of registered investment advisers is expected to decrease substantially upon the enactment of Title IV of the Dodd-Frank Act, the staff expects the number of registered investment advisers and the assets managed by them to grow in subsequent years.  The rate of growth, however, is uncertain.  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 registered investment advisers.  Based on these uncertainties, the SEC faces significant capacity challenges in examining registered investment advisers.

Thus, the staff believes that the SEC likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency.  The staff states the SEC’s examination program requires a source of funding that is adequate to permit the SEC to meet the new challenges it faces and sufficiently stable to prevent adviser examination resources from periodically being outstripped by growth in the number of registered investment advisers.

The staff recommends that Congress consider the following three approaches to strengthen the SEC’s investment adviser examination program:

  • Authorize the SEC to impose user fees on SEC-registered investment advisers to fund their examinations by OCIE;
  • Authorize one or more self regulatory organizations, or SROs, to examine, subject to SEC oversight, all SEC-registered investment advisers; or
  • Authorize FINRA to examine dual registrants for compliance with the Advisers Act.

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