SEC Asks Congress for $ to Examine RIAs and Supervise Finra
As part of its pitch to Congress for a bigger budget, the Securities and Exchange Commission on Monday again raised the specter that unexamined registered investment advisers pose to Main Street investors.
“The number of registered investment advisers and their assets under management has grown steadily over the years, while staff resources have not kept pace with the growing responsibilities,” the SEC said in its fiscal 2019 budget request filed Monday to Congress.
“Significant additional resources are critical to the examination program in order to improve the examination coverage of these entities.”
The SEC’s Office of Compliance Inspections and Examinations managed to lift the exam coverage of RIAs in fiscal 2017 to 15% of the more than 12,500 registered firms in the U.S. despite working with a smaller budget than in 2016 and targeting a 13% rate. It expects to maintain the 15% rate this year and next, according to the request for the fiscal 2019 year that ends on September 30.
In contrast to SEC Chairman Jay Clayton’s testimony last summer that the agency would stretch to protect investors through examinations of the rapidly growing advisory sector while spending less in fiscal 2018, his new request says it needs more money to keep investors safe. The number of RIAs, which includes individual practitioners as well as giant fund companies, has grown 15% over the past five years, and their assets have increased by 40%, according to the proposal.
The SEC requested a 3.5% budget hike to $1.658 billion for fiscal 2019, $56 million more than its $1.60 billion this year. It hopes to bolster the ranks of OCIE by hiring 13 new examiners, after making do in the previous two years with agency-wide cutbacks that led it to transfer some 100 people from other divisions to the exam unit.
The budget request also focuses on the need to develop cybersecurity initiatives and to continue developing the “Retail Strategy Task Force” launched in September. The task force is attempting to use case histories and “smart data” analysis to detect “large-scale wrongdoing” involving pump-and-dump schemes, unsuitable structured products and other sales violation schemes at the advisor level. The SEC outlined these and other areas, including a drill-down into fees and disclosure of conflicts, in its annual priorities letter last week.
But the examination program remains a key initiative. The agency has long struggled to narrow the gap between its low-single-digit rate of exams for advisers and the 37% rate of broker-dealer exams that the Financial Industry Regulatory Authority conducts annually.
The 15% RIA exam target is more than a third higher than the 11% of advisers that the SEC examined in 2016. Still, 35% of RIAs have never been examined, according to the new budget request.
The new budget request also singles out allocations to develop expertise in overseeing cryptocurrency sales and products and to sharpen the SEC’s oversight of Finra, the securities industry-financed self regulatory organization. The budget request refers specifically to sharpening oversight of “the quality of Finra’s examinations of broker-dealers.”
What may i ask do you do with all the $$$$ you receive from fines? Don’t tell me it goes back to the taxpayers!
Nothing more than revenue generating scheme to expand an already bloated bureaucracy. The SEC was notified on more than one occasion about Bernie Madoff and sat on their hands. FINRA charges registered reps for testing, CE, and other fees as they earn CEO level income supposedly protecting the individual investor. For the scope and brevity of the ‘bad apples’, the oversight and regulatory coverage is onerous. Perhaps the SEC and other government regulators could do a better job regulating their own. As always, the phrase, “we don’t have a revenue problem, we have a spending problem” applies.
Do a cursory Google search of “financial fraud” and see how many more RIA’s come up than brokerage advisors. Strange considering there are probably 10 times more brokerage advisors than RIA’s in the world. Could it be if you have dishonest tendencies you may to gravitate to the RIA world? 35% have never been examined! Are you kidding me! Versus major SEC exams and internal exams every couple of years at brokerage houses plus daily compliance review of activity. Bernie Maddoff wouldn’t have survived a day at a brokerage house (ie – “hey Bernie – you just transferred client money into your personal account. You’re fired and are going to jail. Now let’s make the client immediately whole again.”)
Glad to see that the SEC is looking to take some action to sharpen its oversight of FINRA. Please Google the article “FINRA: Who’s watching the watchdog?” originally published by Mark Schoeff Jr. and Bruce Kelly – September 2, 2017. FINRA generates hundreds of millions of dollars per year in revenue, writes its own rules, and has immunity from legal action. As the article further illustrates “Finra is the watchdog that no one is watching.”
While I am sure there are many fine RIAs operating independently, I have seen plenty of wire house advisor’s lured away by the appeal of less supervision available by going independent. There definitely should be a SIGNIFICANT increase in the supervisory exam processes for RIAs. Those with nothing to hide should be fine, however, for the growing number of dishonest individuals operating with no supervision need to be exposed and banned from harming investors!