Mandatory Advisor Exams Are Out At The SEC, "High-Risk" Screening Is In

Monday, March 19, 2012 10:02
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Mandatory Advisor Exams Are Out At The SEC,

Tags: sec

A bit of clarification from the SEC on its examination protocols confirms what many advisors already suspected: the long wait between audits is a matter of regulatory triage.

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The SEC's deputy director of compliance, inspections, and examinations, Norman Champ, revealed recently that they're "not doing routine cycle exams" because they "have to be very careful where [they] send these limited resources."

 

In other words, it's not a matter of waiting in line for your number to come up in the examiners' list. Instead, RIAs go an average of 12 years between audits because the auditors are busy tackling cases on a priority basis.

 

Situations that look like they present a high risk of hurting investors come up first on the SEC screens, Champ says. They get handled first.

 

And then, presumably, the auditors are off to put out the next fire, so they may never get to firms that look like they're in good shape.

 

It might not be the worst approach, especially since it looks like the number of advisor examiners has dropped dramatically in the last few months.

 

There are now 450 examiners who will be watching around 10,000 firms once mid-range RIAs depart to state oversight in a few months.

 

That's 22 firms per examiner. Once again, they can spend about two weeks a year studying each RIA under their supervision and then refer problem cases to specialists.

 

In that case, every firm would get an annual check-up and long-running Ponzi schemes like Bernie Madoff's won't run nearly so long. 

 

Or they can keep putting out fires. 

 

Either way, much like the IRS, the SEC won't say what its red flags are. If crooked advisors knew what the screens were set to detect, they'd change their schemes accordingly to drop back under the radar -- where they may never see an auditor until it's too late.

 

Comments (2)

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bramsay
Good article Scott, and I agree that I think its a good approach.
bramsay , March 19, 2012
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ScottMartin
Thanks for reading and weighing in! For all I know, the "technology" Mary Schapiro keeps asking for would let them take this kind of data mining approach. I just thought they needed new laptops. I should find out how much the IRS's systems cost/save them.
ScottMartin , March 20, 2012

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