Blog Article

SEC Investment Adviser Regulation 2016 Fiscal Year Budget Proposal

Feb 03, 2015

The SEC has released its 2016 fiscal year budget request. The SEC seeks to increase the number of registered investment adviser (RIA) firms examined.

Yesterday, the SEC released its 2016 fiscal year budget request. The official 164 page SEC request and report can be found online on the SEC website.  Below is a short summary of the key details of the proposal which are particularly relevant to registered investment adviser (RIA) firms in regards to RIA compliance and regulation:

  1. As was the case in SEC’s 2015 fiscal year budget proposal, the agency has identified increased examination coverage of RIA firms as its top initiative. Much like last year’s proposal, the very first bullet point of the SEC’s proposed budget outlining the 2016 key initiatives reads Increased examination coverage of investment advisers and other key entities who deal with retail and institutional investors. As such, all investment advisory firms should be aware that increasing the number of SEC RIA audits remains one of the SEC’s top priorities for 2015 and beyond.
  2. In the 2014 fiscal year, the SEC examined 10% of SEC-registered RIA firms which in total represent 30% of the overall regulatory assets under management (AUM) of firms registered with the agency. The SEC’s Office of Compliance Inspections and Examinations (OCIE) is the SEC division tasked with performing investment adviser examinations increased the number of advisory firm audits by 20% in 2014 compared to 2013. For the 2015 fiscal year, the SEC is once again projecting to audit around 10% of all investment advisory firms. As part of the proposal 2016 fiscal year budget, the SEC is seeking to hire an additional 225 examiners within the OCIE to increase the number of investment adviser audits as part of the agency’s National Examinations Program (NEP). This would increase the total number of SEC RIA examiners from the current 1,080 budgeted roles up to 1,080 in total. The SEC believes this increase in examiners would result in around 14% of SEC-registered investment advisers being examined once the examination staff is fully hired and trained. While 14% is still a low figure, this would yield a ~40% increase in SEC investment adviser examinations compared to 2014.
  3. 40% of RIA firms registered with the SEC have never been examined. Early last year, the agency launched its examination program for never before examined advisers. The SEC continues to highlight this as a key priority. The agency does note that the majority of firms which have never been audited before were first registered within the last three years. 
  4. The total number of RIA firms continues to increase every year. In 2015, the SEC estimates there will be around 11,474 SEC-registered investment advisory firms up from the current total of around 10,899. Furthermore, the agency expects the number of advisory firms registered with the SEC to rise to 12,000 in 2016. In regards to AUM, the agency notes that federally-registered RIA firms currently manage $54.3 trillion and that figure is expected to increase to $65.0 trillion in 2016. Combined, this would equate to a 10.1% total increase in RIA firms registered with the SEC coupled with a 19.7% total increase in AUM from 2014 to 2016. As of February 3, 2015, Meridian-IQ estimates that there are presently around 32,230 RIA firms registered at the state or SEC level and in total those firms manage approximately $62.7 trillion in AUM. Thus, the SEC only regulates about 1/3 of all registered investment adviser firms. However, advisory firms registered with the agency control around 86.6% of the industry’s total AUM.
  5. According to the SEC, approximately 76% of 2014 audits of advisory firms identified at least one compliance deficiency. This number is slightly down from the 2012 and 2013 figures of 80%. In 2014, around 12% of investment adviser audits resulted in a referral to the Division of Enforcement. This is down slightly from 13% in 2013. 
  6. As we discussed in a blog post outlining the three types of in-office RIA compliance examinations, the SEC performed 149 “for-cause” advisor examinations in 2014. While not too much should be read into this figure, this does represent a significant drop from the 222 for-cause exams the agency conducted in 2013.

As Ted Knutson of Financial Advisor Magazine notes, despite President Obama’s continued support of increased SEC funding, Congress has never granted the President the agency’s full budget request. Thus, while it’s highly unlikely that the SEC will receive its full budget request, with this public proposal the agency has once again provided investment advisory firms significant insight into current and future areas of focus when it comes to RIA regulation. As has been the case for many years now, the SEC is focused on increasing the number of RIA firms examined on an annual basis.

As RIA compliance consultants, we strongly encourage the Chief Compliance Officer (CCO) of every investment adviser firm to briefly review the SEC’s budget proposal and other SEC regulatory compliance outreach efforts.