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SEC to Focus on RIA Examinations

By Erwin J. Shustak, Esq.  of Shustak Reynolds & Partners, P.C. posted on Wednesday, February 17, 2016.

The Securities and Exchange Commission (“SEC”) is beefing up its efforts to more closely examine Registered Investment Advisory firms. The SEC has announced it intends to increase the number of RIA examiners by 20%- from 530 to 630- as part of its efforts to more closely examine and monitor SEC registered investment advisory firms. The SEC also is planning on contracting with outside, third party companies to assist in examining even more firms.

The SEC intends to shift examiners from its broker-dealer staff to RIA examinations, and by using a budget increase to hire more examiners. Congress recently gave the SEC another $100 million plus, bringing the SEC’s 2016 budget to $1.6 billion.

Examining RIA firms has been one of SEC Chairwoman Mary Jo White’s priorities. The SEC  examined approximately 10% of the approximately 11,500 registered advisors in fiscal year 2015.  By contrast, the SEC and FINRA- the Financial Industry Regulatory Authority that overseas broker-dealers- together examined approximately 51% of the approximately 4,500 broker-dealer firms during the same year. Based on those numbers, therefore, a broker dealer has been five times as likely to be examined in any given year than a similar sized RIA firm, one of the principal reasons so many brokers have shifted their business model from the broker-dealer model to the RIA format. 

The growth of the RIA industry is exactly why the SEC has placed a high priority on examining RIA firms. A decade ago, there were 8,500 SEC registered investment advisors with $24 trillion under management. During the most recent fiscal year, by contract, there are now more than 12,000 investment advisors registered with the SEC, managing a collective total of more than $65 trillion. During 2013, the SEC examined 964 RIA firms, which number rose to 1,150 in 2014 and 1,221 in 2015.

In a bizarre twist, the same week the SEC announced the additional focus and resources it will place on examining RIA firms, the TV mini-series about the  Bernard  Madoff Ponzi-scheme aired on national television. The Madoff scandal, which went on for decades, involved thousands of investors and over $60 billion of assets, was one of the biggest embarrassments in the SEC’s history. By sheer negligence and ineptitude, the SEC simply overlooked and failed to catch the largest financial fraud scheme in U.S. history.

Shustak Reynolds & Partners, P.C.  focuses its practice on the securities industry and matters affecting broker-dealers, registered representatives and the financial services sector. For more information, contact Erwin J. Shustak, managing partner, at [email protected], or call 800.496.5900 for a free consultation.

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