SEC’s Clayton Vows to Do More Exams with Less Funding
SEC Chairman Jay Clayton testified to Congress on Tuesday morning that the agency will increase its examinations of investment advisers by 20% in the current fiscal year and nudge the numbers up a further 5% in fiscal 2018, despite requesting a slightly lower budget than in the current year.
The agency has been struggling for years to upgrade its national examination program of rapidly growing investment advisors, and has managed to increase the numbers from under 10% in 2015 to an expected 13% in fiscal 2017. That is still significantly lower than the percentage of exams that the Financial Industry Regulatory Authority conducts annually of broker-dealers.
Focusing on the “significant value” the American public will get in return for the SEC’s $1.605 billion budget request, Clayton told a subcommittee of the Senate Appropriations Committee that the necessity of examining RIAs who “now manage more than $70 trillion in assets, which is more than three times 2001 levels,” necessitate some invention.
“This is an example of an area where flexibility is necessary,” Clayton said, according to his prepared remarks. “I expect that for at least the next several years we will need to do more each year to increase the agency’s examination coverage of investment advisers in light of continuing changes in the markets.”
He did not give details on how the SEC will continue increasing exams at a time when Clayton and the Trump Administration asked for a slight decrease in the SEC’s 2018 budget to $1.602 billion from the current 2017 fiscal year’s $1.605 billion. That contrasts with increases regularly requested by the Democratic predecessors
In 2016, the agency shifted about 100 people in its pared-down Office of Compliance Inspections and Examinations to its national exam unit. “As a result of this shift and the introduction of efficiencies, the SEC is on track to deliver a 20% increase in the number of investment adviser examinations in the current fiscal year,” Clayton testified, without giving details on how the agency will further shift priorities to do more exams.
He also asserted that the SEC will be able to continue its “vigorous” enforcement division efforts to investigate and bring civil charges against violators of the federal securities laws under the slimmed-down request, without providing details.
Without directly alluding to a recent unanimous Supreme Court decision that restricts the SEC’s ability to require wrongdoers to “disgorge” ill-gotten gains, he also declared: “Successful enforcement actions impose meaningful sanctions on securities law violators, deter future wrongdoing, and result in disgorgement of ill-gotten gains that can be returned to harmed investors.”
The SEC’s 2018 budget request relies on continued access to the a Dodd-Frank Act-mandated reserve fund that many Republicans oppose and that would be eliminated under proposed legislations. Clayton said the SEC is dedicating the reserve funds to technology, which helps it target its enforcement and examination efforts while meeting emerging cybersecurity challenges. “The continued availability of the Reserve Fund historically has allowed us to commit to critical, long-term technology initiatives that otherwise may have been more difficult for us to execute,” he testified.