SEC Exams Can't Keep Up With RIA Growth

The Securities and Exchange Commission’s ability to oversee the growing number of registered investment advisors has come to the fore once again.

The topic was debated at a recent meeting of the SEC’s Investor Advisory Committee, with industry and SEC officials grappling with how to handle this ongoing challenge for the agency. While some officials believe more funding will do the trick, others see Congress having to step in — once again — to try and remedy the problem.

Paul Roye, former senior vice president of Capital Research and Management Co., and a former head of the SEC’s Division of Investment Management, explained at the meeting that, unlike broker-dealers, there’s no self-regulatory organization to assist the SEC in overseeing the investment advisory industry. Thus, the SEC and the states “are the only entities conducting exams of investment advisors.”

In 2022, Roye said, the SEC examined 15% of RIAs. The RIA exam rate has remained mostly stable since 2019, according to SEC reports. In contrast, the SEC and the Financial Industry Regulatory Authority “together examined nearly half of registered broker-dealers,” Roye, a member of the Investor Advisory Committee, said.

Under the Dodd-Frank Act, advisors with at least $100 million in assets under management must register with the SEC. Advisors with fewer assets must register in the states “where they have a principal place of business or have more than a de minimis number of clients,” Roye said.

“There were over 35,000 investment advisors in the United States” as of 2021, with almost 375,000 investor advisor representatives, Roye continued. “Investment advisory firms manage almost $129 trillion, and serve over 65 million clients.”

Since 2016, Roye said, “the number of SEC-registered advisors has increased 25% to over 15,000, and this is a growth rate that far outpaces SEC’s staff increases. Over the same period, the SEC exam staff has increased only 4%.”

In 2021 alone, “900 new advisors registered with the SEC,” Roye relayed. “The largest increase in SEC-registered entities has occurred in the investment advisory industry.”

Roye added this growth “is due, at least in part, to many in the broker-dealer industry migrating to the investment advisor industry.” Since 2012, the number of broker-dealer firms has declined 18%, he said.

The growth in the number of RIAs “does not fully capture the increasing complexity of the investment management industry, whose firms are developing more sophisticated trading and investing strategies, and this results in increasing complexity of the compliance issues and risks covered by examinations,” Roye stated.

In his remarks at the Investor Advisory Committee meeting, SEC Commissioner Jaime Lizarraga, a Democrat, noted that investment advisors “provided asset management services to 47.3 million individual investors in 2020, almost all of whom were non-high net worth individuals. Just one year later, that number grew to 50.6 million clients.”

Commissioner Hester Peirce, a Republican, noted in her comments that “determining how best to deploy the Division of Examination’s never-enough resources is a yearly challenge.” The SEC’s exam staff, she said, “is the face of the commission, and we need to figure out how best to support them in their work.”

Natasha Vij Greiner, deputy director of the SEC’s Division of Examinations, said at the meeting that the SEC plans to “significantly” increase onsite exams of advisors within the next six months, adding that the 15% exam rate in 2022 was “achieved despite continued growth” in the RIA industry.

“Going forward, as the industry continues to grow and change, maintaining our coverage ratio can only be achieved with sustained investments in human capital and technology resources,” Greiner said.