Blog Article

SEC Investment Adviser Regulation 2015 Budget Proposal

Mar 19, 2014

The SEC recently released its 2015 fiscal year budget request. Below is a quick summary of some of the key details in the report.

The SEC recently released its 2015 fiscal year budget request. The official 191 page SEC request and report can be found on the SEC website here.  Below is a quick summary of some of the key details in the report which are particularly relevant to registered investment adviser (RIA) firms when it comes to the future of RIA compliance and regulation:

  1. The SEC has identified increased RIA examinations as its top initiative. The SEC is tasked by Congress with a number of regulatory oversight responsibilities that span from the Division of Corporation Finance to the Office of Municipal Securities. However, the very first bullet point of the SEC’s proposed budget outlining the 2015 key initiatives reads Remedying inadequate examination coverage for investment advisers and other key aspects of the agency’s jurisdiction. As such, all investment advisory firms should take notice that increasing the number of SEC RIA examinations remains one of the SEC’s top priorities for 2015. This mirrors a recent blog post on the SEC’s RIA National Exam Program for Never Before Examined RIA firms.
  2. In 2013, the SEC examined around 9% of SEC-registered RIA firms. The SEC’s Office of Compliance Inspections and Examinations (OCIE) is the SEC division tasked with performing investment adviser examinations. As part of the proposal 2015 fiscal year budget, the SEC is seeking to hire an additional 316 examiners within the OCIE to increase the number of SEC RIA audits. This would increase the total number of SEC RIA examiners from the current 967 budgeted roles up to 1,283 in total. The SEC believes this increase in examiners would result in around 12% of SEC-registered investment advisers being examined in 2015. While 12% is still a small number, this would equate to over a 33% increase in SEC investment adviser audits.
  3. The total number of RIA firms continues to increase every year. In 2015, the SEC estimates there will be around 11,400 SEC-registered investment advisory firms up from the current total of around 10,900. This translates to around a 4.6% increase in RIA firms registered with the SEC. To provide some context, as of March 19, 2014, Meridian-IQ estimates that there are presently around 31,400 RIA firms in total. Thus, presently the SEC is tasked with regulating about 1/3 of all registered investment adviser firms. As a quick refresher, while there are a handful of notable exceptions, generally registered investment advisers with $100 million or more in assets under management are registered with the SEC. As RIA registration consultants, in addition the SEC’s RIA industry growth projections. we are seeing an increased number of state-registered RIA firms and expect the 2015 growth of state-registered RIA firms to be greater than the estimated 4.6% increase of SEC-registered RIA firms. While many leading industry analysts continue to predict increased RIA industry consolidation, the actual figures continue to point otherwise as more and more new RIA firms are being started each year.
  4. As far as total assets under management in the investment adviser channel, the SEC estimates that the present 10,900 SEC-registered RIA firms currently manage around $54.3 trillion in total assets under management and the SEC expects this number to climb to $56.0 trillion in 2015 (3.1% increase. As of March 19, 2014, Meridian-IQ estimates that the total assets under management for all 31,400 RIAs (including SEC-registered RIA firms) is around $56.6 million. Thus, while the SEC may only regulate around one-third of total RIA firms, it does have the responsibility of overseeing around 95.9% of the total assets in the independent RIA channel.
  5. According to the SEC, around 80% of 2013 SEC examinations of advisory firms resulted in a deficiency letter being issued. This number is in-line with the 2012 figure of 80% but up from the 72% rate in 2010. Also, for the first time in 2013, the SEC released that around 13% of investment adviser audits resulted in a referral to the Division of Enforcement.
  6. While the vast majority of deficiencies identified during an SEC RIA examination may not result in a referral to the enforcement division, the SEC continues to prioritize increased education and communication with RIA firms to ensure that RIA firms examined by the SEC are taking the proper corrective actions. In 2013, the SEC estimates that around 86% of RIA firms issued deficiency letters following an audit have taken the proper actions. This is less than the 2013 plan projected figure of 93%. As such, as RIA compliance consultants, we note that all SEC-registered RIA firms should expect the SEC to place even more emphasis in 2014 and beyond on ensuring that RIA firms are responding to SEC examination deficiency letters in a timely and fully corrective manner.  
  7. As we discussed in a recent blog post outlining the three types of in-office RIA compliance examinations, the SEC performed 222 “for-cause” advisor examinations in 2013. As RIA compliance consultants, we believe the SEC continues to do a better job of identifying “high risk” RIA firms and we anticipate this to be a continued point of emphasis in 2014 and 2015.

As Ted Knutson of Financial Advisor Magazine recently wrote, despite President Obama’s support of increased SEC funding, it’s unlikely that Congress will pass an SEC budget increase. Thus, while it may be true that much of what the SEC is pushing for from a funding standpoint may not come to fruition, the SEC has in the process provided quite a bit of insight into current and future areas of focus when it comes to RIA regulation. It’s also now more abundantly clear than ever that the SEC views increasing the percentage of investment adviser examinations as a key priority for years to come.