SEC examines 16% of RIAs, and it’s not likely to go higher

The SEC examined fewer than one out of five RIAs last year, and it might have a hard time hitting that level in the future, an agency official said Friday.

The Securities and Exchange Commission conducted examinations of 16% of the approximately 15,000 registered investment advisers in fiscal 2021, Daniel Kahl, acting director of the SEC’s Division of Examinations, said at an Investment Adviser Association compliance conference in Washington.

The SEC’s annual goal is 15% coverage of RIAs, who have approximately $110 trillion in regulatory assets under management. Even though that level is “woefully low,” Kahl said, the agency may not be able to keep pace because the number of examiners has not materially increased in years while the RIA population is growing rapidly.

“I don’t see us being able to maintain that,” Kahl said. “I guess that probably is good news for many of you [in the conference audience]. I think from our perspective, it’s not where we want to be. We’ve squeezed out as much efficiency as we can.”

During the pandemic, the SEC has been conducting remote examinations as staff members have worked from home. Although SEC staff likely will be able to return to the office in early June, the agency is not in a rush to go back to in-person examinations.

“We don’t see a need to be aggressive,” Kahl said. “It’s unlikely you’ll see examiners in your office. We’ll have a wait-and-see approach.”

The SEC is likely to release its examination priorities in coming weeks. Based on past priorities and a recent proposal, it’s likely that oversight of private funds will be near the top of the list. The private securities market is getting the SEC’s attention because of its rapid growth.

“The private fund industry is very creative,” Kahl said. “We react to what we see. Follow the money. Follow the conflicts.”

In addition to examinations, the SEC panel at the IAA conference also covered enforcement.

Dabney O’Riordan, co-chief of the asset management unit in the SEC Division of Enforcement, discussed a recent $125 millon fine of JPMorgan over its failure to maintain records of employee communications over WhatsApp and other messaging technology.

JPMorgan had policies and procedures in place to track those messages but didn’t follow through on them. It’s a lesson for investment advisers as well, O’Riordan said.

“You can have great written policies and procedures, but if you’re not actually taking steps to implement them on a regular basis, they’re not worth much,” she said.

Another area of enforcement focus is environmental, social and governance investing. The SEC established an ESG enforcement task force last year. The agency wants to ensure that advisers are delivering on ESG investing they market to their clients.

Adam Aderton, co-chief of the asset management unit, used a recent case as an illustration of the enforcement advisers could face if they don’t do what they say they’re going to do.

The agency charged Wahed Invest for making misleading statements because it marketed itself as providing advisory services compliant with Shariah law but didn’t establish related policies and procedures.

“There’s a message there for ESG in that if you say you’re going to follow a particular investment process, you need to have policies and procedures in place to make sure that process is followed,” Aderton said.  

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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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