When the talk turns to Securities and Exchange Commission examinations and inspections, advisors tend to take notice. How can they do otherwise? The SEC conducted more than 1,530 advisor exams last year, 11% of which led to enforcement referrals, and expects to keep up the volume established in the past four or five years even while it is shifting focus, according to recent comments by SEC officials.
First, there may be a little more restraint ahead when it comes to sweep exams. The SEC's Office of Compliance Inspections and Examinations (OCIE) will now give the five commissioners input on planned sweep exams, or at least alert them to the sweeps in an effort at improved coordination, according to Commissioner Paul Atkins. Atkins, who addressed the Investment Adviser Association's (IAA) compliance best practices conference in Washington February 28, spoke with disdain of some SEC staff amassing large penalties the way that some "athletes collect trophies."
Atkins also remarked that the SEC should not be overzealous and penalize advisors retroactively for problems that took place before a new rule has taken effect, nor set regulatory policy during the exam process.
The mandatory registration of hedge funds may strain the OCIE staff. The new requirement "vastly expands the workload of the SEC," Atkins said, and can "greatly impair" efforts to examine other investment advisors who are more important to monitor.
In comments to reporters after his speech, Atkins acknowledged that the inspection staff might be running triage to go where it was most needed because the hedge fund registrants would divert examiners from other registered advisers and mutual funds.
That doesn't mean advisors should take a "safety in numbers" approach, Atkins warned.
Legislative Prompting
Part of the impetus to think about the role of the 11-year-old OCIE and its feared tool of sweep exams, which grew to life during the mutual fund scandals in years past, comes from legislation encapsulated in the Compliance, Examinations, and Inspections Restructuring Act of 2005.
The bill (H.R. 4618), aims to eradicate the powerful inspection office as a separate entity and reintegrate it back into the various policymaking divisions. Such a move might improve interaction between those who form policy and those on the front lines of the exam, according to Atkins, and perhaps create better synergies internally. On the other hand, a stand-alone OCIE might result in more moderate measures, Atkins said, wisely hedging his response.
For the future, expect a more "balanced" approach to exams, said OCIE Chief Counsel John Walsh, speaking at the same conference.
Last year, 52% of OCIE exams were regular exams, and 48% were for cause or other reasons, and Walsh expects that to continue, noting the word "sweep," is over-used. In fact, risk-based sweeps are a declining part of the exam program, Walsh said, because "balance is the goal," and the office is looking for emerging risks.
