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News February 8, 2016 Issue

SEC Reassigning Broker-Dealer Examiners to Advisers

The SEC, perennially short on examiners for the growing number of registered  investment advisers, will be adding 100 more to the task as 2016 progresses – and a significant percentage of them will be existing examiners that currently focus on broker-dealers.

The exact number of broker-dealer examiners being reassigned to advisers is not yet clear, as the SEC has yet to officially announce the shift, but a source familiar with the agency’s thinking said the overall number of new examiners will total 100, a number that has also been reported by the Investment Adviser Association and the Wall Street Journal. The rest of the 100 were authorized in the current fiscal year federal budget.

The increase, along with the 70 new examiners brought on board in 2015, will increase the agency’s Office of Compliance Inspections and Examinations staff by 35 percent to 630, the IAA said. The net result is that advisers stand a greater chance of being examined in this and future years.

The IAA said it "applauds the SEC for its decision to increase the number of examiners dedicated to investment advisers," noting that the association "has long advocated for a significant increase in the number of adviser examiners, both through reallocation of existing staff and the hiring of new examiners. Allocating substantial resources to the adviser examination staff is good, sound public policy that contributes substantially to the SEC’s mission of ensuring investor protection and market integrity, and will meaningfully augment SEC examination of the advisory profession."

Congressional authorizations

The SEC has requested increased funds for hiring examiners every year in recent years. While those requests were typically not completely met, they did result in more funds for examiners. As a result, the number of investment advisers examined increased from 964 in FY 2013 to 1,150 in FY 2014, and then again to 1,221 in FY 2015, the agency said.

The Obama Administration is expected to release its FY 2017 budget in the near future. While the SEC has not yet publicly released any figures for its request, SEC chair Mary Jo White, in testimony before Congress this past November, said that investment advisers and broker-dealers remain high on the agency’s action list. Bloomberg has reported the agency request as being for $1.822 billion, which is about $100 million more than the agency’s FY 2016 request of $1.722 billion. The agency justified that request by detailing how the additional dollars would be used to bring on board more examiners, which would address concerns about not having enough staff to conduct needed exams, as well as other personnel.


About 80 percent of more than 4,000 broker-dealer firms nationwide are currently examined by FINRA, with the remainder examined by the SEC, which also oversees FINRA itself. With about 51 percent of those broker-dealers covered, and the Commission seeking more funding for additional examiners each year, apparently a decision was made to reassign some of those broker-dealer examiners to where they might be needed more.

"I think there is an understandable feeling at the SEC that they need to do something proactively about this issue now, in addition to pursuing other possible longer-term fixes, such as obtaining budgetary increases to hire more examiners," said Stradley Ronon partner Lawrence Stadulis. Shifting some SEC staff examiners over to the adviser side of things increases the probability that these entities, like broker-dealers, also are subject to some level of examination. It is a partial attempt to address a limited examination resource allocation issue."

"The reallocation of broker-dealer examiners to OCIE’s investment adviser inspection staff – plus additional examiners from an increase in the SEC’s 2016 funding – represents the Commission’s continuing concerns about the frequency of adviser examinations," said Ropes & Gray counsel David Tittsworth. "I assume that it will take some time to effectuate the shift from the broker-dealer inspection program to train the examiners, and to have the program up and running. But when fully implemented, this should result in a significant increase in the frequency of investment adviser examinations."

Tittsworth also noted that it will be "interesting to see whether the SEC intends that the shift of broker-dealer examiners to the investment adviser examinations program will be in lieu of – or in addition to – the agency’s consideration of a third-party examination program."

White, in a March 2015 speech, came out in favor of using third-party examiners, saying that they would be the best existing option to supplement the SEC’s own examination efforts in ensuring adviser compliance with a new standard (ACA Insight, 3/23/15). A program of third-party compliance exams for investment advisers, while "not optimal in many ways," would be the best alternative, she said at the time.

Such third-party examiners, if retained, would not replace the SEC’s own examiners from its Office of Compliance Inspections and Examinations, she said, but would serve as a "supplement" to the exams OCIE provides.