RIA Compliance and Practice Management Blog

Key 2018 SEC RIA Examination Frequency and Enforcement Statistics

Posted by RIA in a Box

Feb 13, 2018 8:48:17 AM

SEC RIA audit statistics from 2010 to 2017Yesterday, the Securities and Exchange Commission ("SEC") submitted its budget request for the 2019 fiscal year. The budget request contains a wealth of valuable data as it relates to registered investment adviser ("RIA") compliance examinations conducted by the agency. Previously, we reviewed the key insights from the 2016 and 2017 fiscal year budget requests. We now bring you the latest new findings from this year's budget request highlighted by an increasing examination frequency rate compared to prior years.

Learn More About Automated Employee Trade Monitoring

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:

Number of SEC-registered RIA firms audited annually

Sources: SEC FY 2014 Congressional Budget JustificationSEC FY 2015 Congressional Budget JustificationSEC FY 2016 Congressional Budget Justification,  SEC FY 2017 Congressional Budget Justification, SEC FY 2018 Congressional Budget Justification, and SEC FY 2019 Congressional Budget Justification.. Note: 2018 figures are estimates. and the total number of SEC-registered firms is as of January 1, 2018.

As the table above depicts, the SEC Office of Compliance and Inspections ("OCIE") increased the total percentage of SEC-registered RIA firms audited on annual basis from 11% in the 2016 fiscal year to 15% in the 2017 fiscal year. The SEC had previously projected an increase to 13% in the 2017 fiscal year, and thus actual performance exceeded the plan. During 2017, the total volume of SEC-registered RIA firms grew by 673. Simultaneously during the 2017 fiscal year, the SEC OCIE grew its total volume of examinations conducted by 667 compared to an annual increase of 226 examinations during the 2016 fiscal year.

Better use of data, a movement towards more limited scope exams, and a reallocation of examination staff has allowed the SEC to significantly increase its audit frequency rate for 2017 despite continued growth in the number of federally-registered investment adviser firms. While 15% may still appear to be 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 continued challenge for SEC 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 15% examination rate for the 2018 fiscal year.

As we have noted before, the case can be made that only looking at the volume 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. 

However, the SEC does acknowledge in this latest budget request that nearly 35% of investment advisory firms registered at the federal level have yet to be examined. In particular, the SEC states:

The staff examined approximately 15 percent of registered investment advisers in FY 2017 and nearly 35 percent of all registered investment advisers have never been examined. At the same time, the population of registered advisers subject to SEC oversight continues to grow. To highlight, in just the last five years, the number of registered advisers has grown by over 15 percent and the assets under management of these firms has increased by more than 40 percent. Significant additional resources are critical to the examination program in order to improve the examination coverage of these entities.

As noted above, the SEC examination staff continues to face an uphill battle given the rapid growth of the independent RIA industry. Thus, as reiterated last week with the release of the 2018 SEC investment adviser examination priorities, the "Never-Before Examined Initiative" which was initially launched in 2014 is likely to continue in the coming years.

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:

Percentage of SEC RIA examinations referred to Enforcement DivisionSource:: SEC FY 2019 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. Compared to the 2016 fiscal year, the SEC reported a steady percentage of audits resulting in a deficiency in the 2017 fiscal year. However, the percentage of examinations resulting in a "significant finding" or referred to the Division of Enforcement did continue to decrease in the 2017 fiscal year compared to recent years. However, the fact that 72% of audits conducted in the 2017 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:


Source:: SEC FY 2019 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 meaningful percentage of audits performed each year. It's important to note that the significant increase in total exams conducted in the 2017 fiscal year does not appear to be driven by an increase in for cause exams. In the 2017 fiscal year, the percentage of for cause audits compared to the overall number of RIA audits conducted declined relatively significantly compared to recent years. 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 meaningful 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.

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

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

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