Budget Puts the Squeeze on Adviser Exams

Without significant changes, the SEC cannot fulfill its mandate for examinations of investment advisers, said Elisse Walter, commissioner of the Securities and Exchange Commission (SEC).

 At a public conference in Washington on Tuesday, Walter said there simply are not enough examiners to go around—and that the Office of Compliance Inspections and Examinations (OCIE) is able to examine only about 8% of advisers annually. This figure includes many of the larger and complex advisers that are examined more frequently, she noted, and pointed out that in comparison, about 50% of broker/dealers are examined each year by the SEC and FINRA.

“We should have an ability to conduct on-site exams of even more advisers, even those that seem to present little apparent risk,” Walter said.

Walter noted the general complexity of the advisers for whom they have oversight. Assets under management of advisers registered with the SEC are nearly $54 trillion. “We now have responsibility for advisers to many of the world’s largest and most complex entities,” she said.

Size alone of new registrants is not the only challenge. “We’re responsible for collecting and analyzing far more information than we have in the past,” Walter noted. SEC-registered advisers to hedge funds and other private funds must now submit Form PF, which provides information related to systemic risk. Data is then provided to the Financial Stability Oversight Council, as required by statute, and the SEC also uses it for investor protection purposes. “Having more data is an excellent development, but it does further strain resources,” Walter said.


Examination resources for advisers are facing ever-stiffening competition. Further straining the budget is the need to examine other new registrants, including municipal advisers and security-based swap entities—but the increased responsibility was not matched with additional resources, stretching even thinner the commission’s ability to examine advisers with reasonable regularity.

Pointing to the SEC’s 2011 report to Congress, Walter brought up potential solutions, including the imposition of a user fee on advisers or creating a self-regulatory organization. Of course, she noted, “a substantial increase in the SEC’s budget could address the issue as well.” But she did not advocate for any solution in particular, emphasizing that she was advocating on behalf of investors. “One of the solutions must be pursued today,” she said.

Although zeroing in on advisers who, targeted for their size or practices, appear to present a greater risk to investors, can be effective, “targeting risk is not enough. There is frankly no substitute for what we learn and can detect through an on-site examination,” Walter said. “We should have an ability to conduct on-site exams of even more advisers, even those that seem to present little apparent risk.”