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Regulation and Compliance > Federal Regulation > SEC

SEC Using More ‘Tactical’ Approach to Exams: Risk Chief

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The Securities and Exchange Commission uses a “much more tactical approach” to examining investment advisors than a decade ago, and the agency’s exam division considers how long it’s been since an advisor has been examined when picking firms, Peter Driscoll, head of the new Office of Risk and Strategy, said Thursday.

“Age of the last exam and if they [an advisor] has never been examined is considered by the risk team,” Driscoll said in remarks at a meeting of the SEC’s Investor Advisory Committee. “If we haven’t been into a firm for seven years, we’ll consider that,” along with other risk parameters like the types of products offered and whether they have custody of client assets.

Driscoll was named to head the new risk and strategy office, housed within the SEC’s Office of Compliance Inspections and Examinations, in March.

Driscoll also said that his office is working on several data analytics initiatives with the SEC’s Division of Economic and Risk Analysis to catch risks among firms.

For instance, he said, the risk and strategy team is now able to consolidate in “readable format” all Forms ADV Part II and perform “analytics on that data set” to identify risks. Also, the risk and strategy office has new tools that “look geographically” at where advisors and reps are spread throughout the country — for instance, to see if they’re near an elderly facility or retirement home.

Driscoll noted that his office, RAS, looks at “50 different factors” in assessing advisors’ risks, such as their size and whether they have custody of assets.

Driscoll also noted that his office is “really focused” on anti-money laundering violations and has been working with the enforcement division to share information in this area. The SEC, he said, has hired former Treasury Department Financial Crimes Enforcement Network (FinCEN) employees to help the agency enforce AML and suspicious activity report compliance.

SEC Chairwoman Mary Jo White noted in her remarks at the meeting that while the agency has become “smarter” about exams by using “risk-based analytics and employing tools like targeted or limited-scope exams,” more is still needed.

The advisor population, White said, “continues to grow at a rapid rate and our objective is to expand our coverage to protect investors across the spectrum.”

She reiterated the recent decision by the agency to transition some staff examiners from the broker-dealer examination program to the IA/IC exam program, “with a goal of increasing overall staffing levels in the IA/IC examination program – between transitioning staff and new hires – by 20%.”

While “that will help,” White said, it “is not nearly enough.”

She then noted the agency’s Division of Investment Management’s continued work on a third-party advisor audit rule, which would be designed to enhance SEC exams, not replace them.

The third-party advisor audit proposal is expected this spring.

All of the measures to boost advisor exams, she said, “will not close the gap. It is a long road to having the resources we need to reach an acceptable level of exam coverage for investment advisors.”


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