SEC Starts Exam Sweep of Never-Examined Advisors

Fulfilling its promise to zero in on advisors who have never been examined, the Securities and Exchange Commission announced Thursday its exam sweep of such advisors through its Never-Examined Advisor Initiative.

Jane Jarcho, national associate director of the SEC’s Office of Compliance Inspections and Examinations’ exam program for advisors and investment companies, said Thursday that the initiative would be directed at never-examined advisors registered with the SEC for three or more years.

“Our examinations will focus on areas most important to protecting investors,” Jarcho said. “We will also promote compliance by engaging with these advisors through outreach efforts.”

OCIE will conduct examinations of a “significant percentage of advisors” that have not been examined since they registered with the SEC. These examinations, Jarcho said, will concentrate on the advisors’ compliance programs, filings and disclosure, marketing, portfolio management and safekeeping of client assets.

Andrew Bowden, the OCIE director, said last October that the agency would take aim at the group of about 4,000 RIAs that have never been examined.

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Excluded from the initiative, however, will be advisors to private funds, which are being examined pursuant to the “Presence Exam” initiative launched in October 2012.

David Tittsworth, executive director of the Investment Adviser Association in Washington, told ThinkAdvisor that IAA is "extremely pleased" with OCIE’s announcement. Citing statistics released by the SEC in recent years, Tittsworth says that the number of investment advisory firms that have never been examined "approaches 40%" of all SEC-registered entities. "There is absolutely no doubt that the SEC can and should do a better job – even within its constrained resources – of taking steps to ensure that all advisory firms are touched by SEC examiners."

The Never-Before Examined Initiative includes two distinct approaches: risk assessment and focused reviews. The risk assessment approach is designed to obtain a better understanding of a registrant, the letter says. This type of exam may include a high-level review of an advisor’s overall business activities, with a particular focus on the compliance program and other essential documents needed to assess the representations made on disclosure documents.

Duane Thompson, senior policy analyst at fi360, says he expects "the vast majority of the ‘never-inspected’ group to [receive] deficiency letters, meaning they will have to make adjustments to their compliance programs." However, Thompson doesn't believe they'll be "any Madoff headlines. Over the years only a tiny percentage [of advisors] are referred to the SEC’s Enforcement Division for serious problems." Overall, he adds "most advisor’s compliance programs will be improved by the experience." 

In a letter to these advisors, Jarcho sets out further parameters of the exam program, and familiarized advisors with the agency’s National Exam Program. However, the letter states that receiving the letter “does not necessarily mean your firm will be examined. The NEP staff will contact you separately if your firm is selected for an examination.”

Starting later this year, Jarcho said that OCIE will invite SEC-registered investment advisors who have yet to be examined to attend regional meetings where they can learn more about the examination process.

She also directed these advisors to review the Investment Advisers Act of 1940 and “other useful guidance” on the SEC’s website to find information regarding their obligations.