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News February 9, 2015 Issue

2016 SEC Budget Proposal Calls for 225 More Examiners

The SEC doesn’t have Santa Claus or the Easter Bunny. It has the Obama Administration’s proposed $200 million budget increase, much of which would go toward hiring 225 additional examiners. Santa Claus and the Easter Bunny, of course, are not real.

Just how real the budget proposal is will be determined in the months ahead, but conventional wisdom is that much of the Administration’s budget is a wish list that is the opening salvo to upcoming negotiations with Congress. What will emerge may not resemble the budget proposal issued February 2.

Just for the record, though, the FY 2016 SEC budget would increase to $1.72 billion, an approximately 15 percent increase over its current funding. Of the 225 proposed additional examiners, 180 would be assigned specifically to advisers and investment companies. If it happens, it will be on top of the 105 SEC examiners added in the current FY 2015 budget, of which 72 were specifically assigned to advisers and investment companies. Total examiners under the SEC’s Office of Compliance Inspections and Examinations would increase from 1,080 in 2015 to 1,305 in 2016.

"I share the conventional view that the budget that gets passed will be different. But also the view that the SEC remains underfunded for the mission it has been given," said Stroock partner and former SEC director of the Division of Investment Management Robert Plaze.

If the SEC’s FY 2016 wish is granted, the agency expects the percentage of advisers it examines will increase from an estimated 10 percent in this fiscal year to 12 percent in FY 2016, according to the budget proposal. The percentage of investment companies examined would increase from an estimated 12 percent in FY 2015 to 14 percent in FY 2016.

"Once fully on-board and trained, the investment adviser examiners would assist the agency’s National Examinations Program in increasing its examination coverage of advisers to an anticipated rate of approximately 14 percent per year," the agency said, referring to the percentage it expects to examine per year once all the new examiners are hired, rather than the 12 percent it specifically lists as an estimate for FY 2016.

The Investment Adviser Association is "pleased that the administration is recommending additional funding to further the SEC’s important missions of protecting investors and fostering capital markets," said IAA vice president for government relations Neil Simon. "We also believe that the SEC must use its existing resources more efficiently and encourage the SEC to continue the progress it has made in this area. More strategic allocation of existing SEC resources together with additional funding will enhance the SEC’s oversight of investment advisers."

Data and technology

The SEC has made no secret of its increasing use of data mining and analysis in checking on how advisers and investment companies comply with its regulations. The agency would use part of the proposed increase to:

Develop data analytics tools. These would further the agency’s work in integrating and analyzing financial market data, "employing algorithms and quantitative models that can lead to earlier detection of fraud or suspicious behavior."

  • Further refine examinations. These enhancements would have a goal of improved risk assessment and surveillance tools "that will help the staff monitor for trends and emerging fraud risks, as well as improving the workflow system supporting SEC examinations."
  • Enhance its tips, complaints, and referral system. The goal is to provide more flexible and comprehensive intake, triage, resolution tracking, searching and reporting functionalities, with full auditing capabilities, the agency said.
  • Increase enforcement investigation and litigation tracking. The SEC would like to build the capability to permit electronic transmittal of data for tracking and loading, implement a document management system for the Division of Enforcement’s internal case files, and revamp the tools used to collect trading data from market participants.
  • Create an enterprise data warehouse. This would be a centralized repository for the SEC to "organize its disparate sources of data and help the public gain easier access to more usable market data," the agency said.
  • Enhance the agency’s own cybersecurity. The SEC will seek to "further automate controls, continue the transition to a posture of continuous monitoring, build the agency’s risk management capabilities and strengthen the privacy program."
  • Enforcement

    The SEC would also use the increased funding in the proposed budget to fill 93 positions in the Division of Enforcement that fall into three areas:

    Staff proficient in conducting intelligence processing and analysis. Twenty of the 93 persons hired would be involved, analyzing large datasets, including SEC filings and trading data in equities, options, and municipal bonds.
  • Investigative staff, allowing the agency to more swiftly and effectively identify and respond to securities-related misconduct. Fifty of the 93 positions would be filled here. These new employees will "help the Division continue progress on existing investigations and handle its increasing case load, while quickly investigating and bringing emergency actions in matters where investors’ money may dissipate if immediate action is not taken," the agency said.
  • Litigation staff to handle an expected increased caseload. "In recent years an increasing percentage of enforcement actions have been filed as contested matters, as opposed to being fully settled at the outset," the agency said.
  • Investment Management

    The Division of Investment Management is seeking a budgetary increase of about $5 million, from an estimated $45.1 million in FY 2015 to $51.2 million in FY 2016. The Division would use the additional funds, among other things, to:

    Expand and update data requirements used by the Commission to understand the risks of the asset management industry and develop appropriate regulatory responses.
  • Ensure that registered funds enhance their fund-level controls "so they are able to identify and address risks related to the composition of their portfolios, whether those spring from the overall financial profile of a fund, such as its liquidity levels, or the nature of specific instruments, such as derivatives."
  • Make sure that firms have a plan to transition client assets when necessary, so that advisers and clients are better prepared for such a situation.