SEC Confesses It Will Probably Never Be Able To Supervise RIAs As Often As Congress Wants

Thursday, November 17, 2011 07:36
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SEC Confesses It Will Probably Never Be Able To Supervise RIAs As Often As Congress Wants

Tags: sec

The head of the SEC's RIA examination team dropped a bombshell on Congress yesterday, saying 38% of all SEC-registered advisors have never been examined, and adding it's  "likely" no way to improve that track record.

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Carlo di Florio, Director of the Office of Compliance Inspections and Examinations, told the Senate banking committee that his team has accepted the inevitable.

 

"The staff recently concluded that the Commission likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisors with adequate frequency," he said.

 

As he points out, there are 900 examiners for 25,000 registrants and as di Florio says, "at current funding levels, we will not be able to expand our supervision."

 

That is not good news for advisors who want to remain under SEC oversight -- as imperfect as it might be.

 

His colleague, Eileen Rominger, who runs the SEC's investment management division, simply repeated the options that we have been talking about all year: pass higher supervision costs on to RIAs, let FINRA monitor dual-registered or "hybrid" advisors, or just hand the whole channel over to "one or more SROs."

 

But there's one point in di Florio's testimony that needs digging out. 

 

At 900 inspectors per 25,000 advisors, as long as each inspector takes a good hard look at about 28 advisors a year, every single file will get reviewed on an annual basis.

 

Counting holidays and vacations, that's maybe a two-week audit cycle. Naturally, more complex cases would take a lot more time and resources, but at a minimum, scanning the paperwork for gross irregularities shouldn't take more time than that.

 

As it happens, that audit staff is crunching the books on 8% of the advisor population every year. That's 900 inspectors auditing 2,000 files, or about two cases per inspector per year.

 

Does it take six months to know if an advisor is on the level? Maybe, maybe not. You know better than I do how much paperwork's involved here.

 

Does it have to take six months? That's another question that nobody's asking.

 

In separate comments, Robert Khuzami of SEC Enforcement says his team is starting to fact-check ADVs for blatant errors. 

 

I thought they did that already, but if they start, it might be a great way to screen obvious problem cases that might need six months to straighten out from everyone else.

 

And if that helps to make the SEC more efficient -- while still catching the bad players -- everybody wins, right?

 

Comments (1)

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bramsay
Wow, talk about duplicity. So Congress wants the SEC to supervise more, but won't provide funding to do so, and won't let them charge fees to do so.

But Congress is ok with FINRA charging adequate fees to supervise. What complete ideologically driven BS.



bramsay , November 17, 2011

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