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Regulation and Compliance > Federal Regulation > SEC

SEC Fears Falling Behind on Advisor Exams

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What You Need to Know

  • The number of RIAs the SEC oversees increased from about 12,000 to more than 13,900.
  • The regulator will examine some RIAs that didn't file a Form CRS.
  • The SEC is “working on” an ESG risk alert.

“It’s going to be a tough year” for the Securities and Exchange Commission’s exam team without additional resources, Pete Driscoll, director of the Divisions of Examinations, said Thursday.

Speaking at the Investment Adviser Association’s virtual compliance conference, Driscoll said that the growth of the advisory industry “continues to escalate, and certainly the complexity does too.”

The exam division is “hoping for 15% exam coverage of advisors,” as examiners were able to achieve in 2020, “but it’s going to be tough without additional resources,” Driscoll said.

Driscoll noted the “nutty year” so far with COVID, market volatility and meme stocks. “There’s just a lot of areas where we have to pivot from a cause perspective.”

The SEC noted Wednesday in releasing its 2021 exam priorities that examiners completed 2,952 exams in fiscal 2020, a 4.4% decrease from fiscal 2019.

In the last five years, the number of RIAs the SEC oversees increased from about 12,000 to more than 13,900, and the assets under management of RIAs increased from approximately $67 trillion to $97 trillion, the agency reported.

A longstanding complaint by SEC chairs and officials is that the agency lacks the resources to do its job.

That worry was reiterated in the just-released 2021 exam priorities list — particularly as it relates to advisor exams.

Coverage of RIAs increased from 10% in 2014 to a high of 17% in 2018. The Division’s coverage of RIAs in 2020, “a year in which the RIA population continued to increase and the pandemic necessitated a mid-year shift to remote examining,” was 15%.

The exam division “has been fortunate enough that technology was there and our ability to switch like that was pretty seamless,” Driscoll said.

However, as noted in the exam priorities, “there remains a significant risk that, in light of industry growth and increased complexity and other factors, it does not have sufficient resources to adequately cover the RIA space.”

The Exam Division’s coverage rates “will likely not keep pace with the continued growth in the population and complexity, without corresponding staffing increases,” the agency said.

Before COVID, “we were doing around 30% of our exams through correspondence. I think that that will be higher. There’s no substitute for being onsite, but I think a lot of the types of the exams that we do are very conducive through correspondence and interview and particularly how the world of Zoom — the world of virtual has been so successful.”

That being said, “in certain circumstances, we’ve got to be there,” Driscoll added. “Pretty significant fraud concerns” would prompt examiners to do an onsite exam.

In 2020, the exam division “pivoted to focus on the most pressing risks — including examining whether registered firms’ business continuity plans were updated, operational and effective, and addressing increased cybersecurity risks facing firms and investors,” the agency’s priorities report said.

Form CRS Warning

“We had identified hundreds of firms that we believed should have filed a Form CRS but didn’t,” Driscoll said.

The exam team “did an outreach,” some cases twice in an informal way, as those firms had retail clients. “We had a large number that didn’t respond to us — at all,” Driscoll said. “We’re opening up exams on them to look at the requirements and whether or not that firm should have filed, particularly as they were nonresponsive to us.”

ESG Risk Alert Coming

Driscoll noted that the agency is “working on” a risk alert tied to environmental, social and governance investing based on exams the division has conducted this past year. “One of the things we’ve heard is the industry wanting to get into compliance, wanting to get some help.”

The SEC announced Thursday the launch of a new Climate and ESG Task Force in the Division of Enforcement, which will “develop initiatives to proactively identify ESG-related misconduct.”

The task force will be led by Kelly Gibson, the acting deputy director of enforcement; she will oversee a division-wide effort, with 22 members drawn from the SEC’s headquarters, regional offices and specialized enforcement units.

Pictured: SEC building in Washington. (Photo: Shutterstock)


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