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November 16, 2011 at 09:13 AM
Carlo di Florio, director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, told a Senate panel on Wednesday that even after the shifting of advisors with $100 million or less in assets under management to state registration by mid-2012, OCIE “will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisors with adequate frequency.”
Despite the fact that the Dodd-Frank Act shifted responsibility for examining smaller advisors to the states, di Florio told the Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment that the SEC is picking up under Dodd-Frank oversight of municipal advisors, five new categories of securities-based swap participants as well as hedge fund and other private fund advisors.
Said di Florio: “The approximately 25,000 registrants in the SEC regulated community in FY 2012 will dwarf the size of the current examination program (currently slightly less than 900 total staff nationwide). At current funding levels, we will not be able to expand our supervision of the population of current and future supervised entities.”
Di Florio went on to say that despite the fact that OCIE has instituted a new examiner training program, “no matter how much we improve [SEC exams] 830 examiners can only cover a small portion of the 25,000 registrants.”
While not specifically stating that FINRA should take up the slack and become the self-regulatory organization for advisors, the SEC, di Florio said, has one examiner for every 30 registrants, whereas the Financial Industry Regulatory Authority has one examiner for every five registrants. Only 8% of advisors were examined in 2011, he said, and one-third (38%) of advisors have never been examined. In addition, he said, out of more than 160,000 broker-dealer branch offices, less than 1% of these offices are examined by either the SEC or FINRA annually.
All six directors of the SEC’s various divisions, including di Florio, testified at the hearing, “Management and Structural Reforms at the SEC: A Progress Report,” with nearly all citing the tight budget constraints their divisions are working under specifically as they attempt to tackle added duties under Dodd-Frank.
Sen. Jack Reed, D-R.I., chairman of the subcommittee, said in his opening remarks at the hearing that “Congress must fully fund the SEC, our market watchdog, if it is to effectively discharge its mandate to police the markets and protect investors.”
As all six SEC directors noted in their joint written testimony, the next step under Dodd-Frank of “making the new oversight regimes operational will require significant additional resources.” But that increased funding doesn’t look likely.
