Explosive growth in the number of registered investment advisors and the assets they manage may be manna for the industry. But effectively overseeing the industry presents the Securities and Exchange Commission with one of its leading challenges, according to a report the SEC’s Office of Inspector General sent to SEC Chairman Jay Clayton today.
At a time when the number of registered advisors has risen by more than 15 percent and assets under management by 40 percent, the SEC’s annual appropriation from Congress has remained flat at $1.6 billion since 2016. That has resulted in a 2017 hiring freeze that remains in effect today and has triggered a 5 percent decline in SEC staff in just one year to 4,459 positions in 2018.
But the SEC is not only hampered by a stagnant budget and shrinking staff, found the report, “The Inspector General’s Statement on the SEC’s Management and Performance Challenges.” It is also limited by its own failure to streamline processes, leverage technologies and analytics, meet deadlines for enforcement cases and ensure effective human capital and security management.
Ensuring sufficient examination coverage of RIAs by the SEC’s Office of Compliance Inspections and Examinations (OCIE) remains an “immediate and pressing need for ensuring the sufficient examination coverage of registered investment advisors,” the OIG report found.
Given the current levels of RIA growth, OCIE “estimates there will be approximately 20 investment advisers per staff members. In addition, it is anticipated that the population of investments advisors will be larger and more complex than ever,” the SEC said.
The SEC’s National Examination program is charged with protecting the interests of retail investors by determining whether money managers handling retail customers funds are complying with the SEC rules. While SEC staff examined about 15 percent of RIAs (an increase over prior years), nearly 35 percent of all RIAs have never been examined, the SEC’s own FY 2019 Congressional Budget request stated.
To cope, the SEC wants Congress to approve the addition of 24 OCIE positions in FY 2019 -- the largest increase for any division or office. The new staff will “partially restore critical staffing losses from the last two years, enhance examination coverage of investment advisors, focus on critical risks impacting market participants, address new responsibilities and implement other program improvements.”
However, given its limited resources, the SEC itself has failed to fully leverage risk-based processes and leverage technology to address regulatory challenges including those of the examination program, the OIG found.
That has also meant that, to date, the SEC has not followed up on an OIG suggestion to create a risk-based rating system for closed exams, OIG said.
“To assess aspects of the SEC’s investment advisor examinations, in FY 2017, we initiated an audit to determine whether OCIE established effective controls over its investment adviser examination completion process,” OIC stated.