RIA Compliance and Practice Management Blog

Key 2017 SEC RIA Examination Frequency and Enforcement Statistics

Posted by RIA in a Box

Jul 5, 2017 9:45:00 AM

SEC RIA audit statistics from 2010 to 2017Recently, the Securities and Exchange Commission ("SEC") submitted its budget request for the 2018 fiscal year. As has been the case in recent years, the budget request contains a wealth of valuable data as it relates to registered investment adviser ("RIA") compliance examinations conducted by the agency. Last year, we reviewed the key insights from the 2017 fiscal year budget request and now we bring you the latest new findings from this year's budget request highlighted by an increasing examination frequency rate compared to prior years.


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How many SEC-registered RIA firms are examined each year?

This first table outlines the historical number of firms registered at the federal level with the SEC along with the frequency of RIA audits conducted by fiscal year:

2017 SEC RIA exam frequency statistics

Sources: SEC FY 2014 Congressional Budget JustificationSEC FY 2015 Congressional Budget JustificationSEC FY 2016 Congressional Budget Justification,  SEC FY 2017 Congressional Budget Justification, and SEC FY 2018 Congressional Budget Justification.. Note: 2017 figures are estimates. and the total number of SEC-registered firms is as of June 1, 2017.

As the table above depicts, the SEC is projecting a two percentage point increase in the overall percentage of investment advisers examined annually for the 2017 fiscal year. Better use of data, a movement towards more limited scope exams, and a reallocation of examination staff has allowed the SEC to increase its audit frequency rate for 2017. While 13% is still a relatively low figure, it's a significant improvement compared to five years ago in 2012 when the audit rate was 8% with even fewer firms registered. However, the challenge for SEC Office of Compliance Inspections and Examinations ("OCIE") is that the volume of federally-registered firms continues to rise on an annual basis. Given this challenge, the SEC is projecting an unchanged 13% examination rate for the 2018 fiscal year.

As we have noted before, the case can also be made that just looking a the raw number of firms audited relative to total number of firms is a bit misleading. Instead, some argue a more relevant benchmark is the percentage of the industry's total regulatory assets under management which are examined annually. When looking at that metric, the SEC has previously stated that the agency examined around 30% of the total assets managed by federally-registered RIA firms during the 2014 fiscal year. In other words, the agency continues to generally prioritize its limited resources towards larger firms. 

What is the typical outcome of an SEC investment adviser audit?

This second table outlines the percentage of annual examinations that result in deficiencies, a "significant finding", and/or a referral to the Division of Enforcement:

2017 SEC RIA audit enforcement referral statisticsSource: SEC FY 2017 Congressional Budget Justification  and SEC FY 2018 Congressional Budget Justification. Includes examinations of broker-dealer firms and other institutions.

The good news is that a relatively small percentage of SEC exams of investment advisory firms result in referrals to the Division of Enforcement and that figure continues to decrease as of late. In the 2016 fiscal year, the SEC also reported a slight decrease in the percentage of audits resulting in a deficiency or significant finding compared to recent years. However, the fact that 72% of audits conducted in the 2016 fiscal year did result in at least one deficiency shouldn't be overlooked. 

How many "for cause" RIA exams does the SEC conduct each year?

This third table outlines the number of "for cause" exams performed each year:

2017 SEC RIA audits for cause stats

Source: SEC FY 2017 Congressional Budget Justification and SEC FY 2018 Congressional Budget Justification. Includes examinations of broker-dealer firms and other institutions.

"For cause" exams are audits often generated by tips and remain a relatively small, but not insignificant percentage of audits performed each year. It's important to note that the increase in total exams in the 2016 fiscal year does not appear to be driven by an increase in for cause exams. In 2016, the percentage of for cause audits compared to the overall number of RIA audits conducted declined slightly compared to the 2015 fiscal year. While the SEC does not disclose the percentage of for cause exams that result in referrals to the Division of Enforcement, it's a fair assumption that a significant percentage of firms referred to enforcement originate as a for cause exam related to prior suspicion or concern.

Be sure to check back soon as we continue to provide more relevant SEC investment adviser examination statistics and insights.

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Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Operations, RIA Compliance

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