RIA Compliance and Practice Management Blog

An Overview of SEC RIA Examination Statistics and Findings

Posted by RIA in a Box

May 26, 2016 1:32:18 PM

Earlier this week, the Securities and Exchange Commission (SEC) budget request for the 2017 fiscal year was back in the news as the United States House of Representatives Appropriations Committee submitted a budget proposal that in includes a $50 million budget cut for the SEC compared to its current 2016 fiscal year budget of $1.605 billion. If the SEC budget for 2017 is ultimately reduced, it would represent a significant change in direction for SEC funding as the agency has consistently received budget increases for much of the past decade and beyond.

The future SEC budget is significant to registered investment adviser (RIA) firms as the agency has been very vocal in representing that the increased budget will be largely allocated to increasing the exam frequency of investment advisory firms. Given the steady growth of the investment adviser industry, a reduced SEC budget could accelerate the introduction of third-party investment adviser audits, raising the registration threshold to transition more firms to state-level registration, or other alternative proposals designed to increase RIA audit frequency.

Download our RIA Firm Key Performance Indicator Checklist Now

However, perhaps even more relevant to the investment adviser community is that the annual SEC budget proposal contains a wealth of valuable data as it relates to the scope, frequency, and results of compliance examinations conducted by the agency. Given that the SEC staff recently outlined the different types of investment adviser audits ranging from "for cause" to surprise visits during its recent online webcast, a review of recent SEC budget proposal provides valuable data for the Chief Compliance Officer (CCO) of every investment advisory firm to review. 

How many SEC-registered RIA firms are audited annually?

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:

Number and frequency of RIA exams conducted by the SECSources: SEC FY 2014 Congressional Budget JustificationSEC FY 2015 Congressional Budget JustificationSEC FY 2016 Congressional Budget Justification, and SEC FY 2017 Congressional Budget Justification. Note: 2016 figures are estimates.

As the table above depicts, the overall percentage of investment advisers examined annually by the SEC remains relatively low, however there has been a steady improvement as the number of audits conducted has continued to rise in recent years. The challenge for SEC Office of Compliance Inspections and Examinations is that the volume and size of federally-registered firms continues to rise. In its 2017 fiscal year budget proposal, the SEC highlights this growth by stating, "from 2001 to 2015, assets under management of SEC-registered advisers increased approximately 210 percent from $21.5 trillion to approximately $66.8 trillion." 

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 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 prioritize its limited resources towards larger firms. As such, it's important to remember that the vast majority of investment adviser assets at the federal registration level are managed by a small handful of large firms as depicted by this table below:

Total number of SEC-registered RIA firms segmented by total assets under managementSource: SEC Registered Investment Adviser Information Report as of May 2, 2016. The table does not include investment advisory firms that are registered at the state level.

As the table above depicts, the 1,285 firms with $5 billion or more in assets in total make up only 10.7% of the federally-registered advisory firms from a volume perspective, but represent 89.7% of the total assets under management for firms registered at the federal level. Therefore, it's fair to assume that many of the larger firms are being audited by the SEC on a more frequent basis.

What are the typical results and findings of an SEC investment adviser examination?

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:

sec-ria-exams-with-deficiencies-referred-to-enforcement.pngSource: SEC FY 2017 Congressional Budget Justification and includes examinations of broker-dealer firms and other institutions.

The good news is that a small percentage of SEC exams of investment advisory firms result in referrals to the Division of Enforcement and that figure has been slightly decreasing as of late. However, 11% is still a significant figure and further reinforces the risks for firms that do not implement a robust compliance program. It's also important to note that while the figure has trended down a bit as of late, the vast majority of investment adviser audits at the federal level still result in at least one regulatory compliance deficiency.

Compared to the results of 2015 state-registered investment adviser audits released by the North American Securities Administrators Association (NASAA), it would appear that larger firms typically audited by the SEC are about equally likely to result in deficiencies compared to exams of smaller firms (typically firms with less than $100 million in assets under management) conducted by various state regulators. As an example, 74.8% of state-registered investment advisory firms with assets greater than $0 had at least one books and records-related regulatory compliance deficiency

How many "for cause" exams of RIA firms does the SEC conduct annually?

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

Number of annual for cause SEC RIA audits

Source: SEC FY 2017 Congressional Budget Justification and 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 every 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 follow the SEC's efforts to increase the frequency of investment adviser audits.

Download Our Free How to Prepare for an RIA Regulatory Exam Checklist


Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

RIA Compliance & Practice Management

Stay up to date on the latest RIA compliance, operations, and technology topics.

Hear from industry experts as they keep you up to date on the latest regulatory developments and practice management topics.

Subscribe to Email Updates

Recent Posts