Written by Michael Wu
On January 19, 2011, the Securities and Exchange Commission (“SEC”) released its study regarding the need for enhanced examination and enforcement resources for investment advisers. Specifically, the SEC examined the following areas: (i) the number and frequency of examinations of investment advisers by the SEC during the past 5 years, (ii) whether the SEC’s designation of one or more self-regulatory organizations (“SROs”) to augment the SEC’s oversight of investment advisers would improve the frequency of examinations of investment advisers, and (iii) the current and potential approaches to examining the investment advisory activities of dually registered broker-dealers and investment advisers and investment advisers that are affiliated with broker-dealers.
According to the study, the number of registered investment advisers, including hedge fund and private equity fund managers, and the overall assets managed by such advisers has increased over the past 6 years, while the SEC staff dedicated to examining investment advisers has declined. The study noted that the number of SEC examinations decreased since 2004 by nearly 30% and the frequency of such exams by 50% – this was before the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created additional responsibilities for the SEC. Under the Dodd-Frank Act, the SEC will be required to (i) examine larger, more complex entities, which take more resources to examine; (ii) examine municipal advisers, security-based swap dealers, major security-based swap participants and security-based swap data repositories, which are now required to register with the SEC; and (iii) conduct annual examinations of credit rating agencies and clearing agencies designated as systemically important. In Commissioner Elisse B. Walter’s speech regarding the study, she stated that “the Commission is not, and, unless significant changes are made, cannot fulfill its examination mandate with respect to investment advisers.”
The SEC has recommended that Congress consider the following three approaches to strengthen the SEC’s investment adviser examination program: (i) authorize the SEC to charge SEC-registered investment advisers “user fees,” which would be used to fund the investment adviser examination program; (ii) authorize one or more SROs to examine, subject to SEC supervision, all SEC-registered investment advisers; or (iii) authorize the Financial Industry Regulatory Authority (FINRA) to examine dual registrants for compliance with the Investment Advisers Act of 1940, as amended.