On October 17, 2016, Marc Wyatt, the Director of the SEC’s Office of Compliance, Inspection and Examinations, gave a keynote address to the National Society of Compliance Professionals titled: Inside the National Exam Program in 2016. In addition to discussing his general perspective concerning the program, he provided some key statistics that help put OCIE’s exam program in context:
- OCIE has examination responsibility for over 28,000 registrants, including more than 12,000 investment advisers, approximately 11,000 mutual funds and exchange-traded funds, and over 4,000 broker-dealers.
- OCIE has a total staff of approximately 1000 individuals.
- OCIE completed 2,400 total exams in FY 2016.
- Typically, about 10% of OCIE exams are referred to Enforcement.
- FINRA and the SEC have historically examined 50% of BDs each year.
- OCIE has historically examined approximately 10% of registered investment advisers per year.
- Over the past two years, over 2,000 new investment advisers have registered with the SEC.
- OCIE has about 450 staff members focused on Investment Adviser/Investment Company (IA/IC) exams.
- The Private Funds Unit within OCIE currently has four exam managers, and primarily targets the New York, Boston, Chicago and San Francisco areas, each region having a high concentration of registered investment advisers to private funds.
- There are approximately 4500 private fund advisers registered with the SEC.
- Jennifer Duggins, co-head of the Private Funds Unit, recently noted that this unit’s goal was to double the number of examiners assigned to the unit from its current staff of 12-14 to a target of 25-30 examiners.
How has the staff responded to newly-registered investment advisers?
In light of increased numbers of newly-registered investment advisers, over the past two years the regional offices have piloted a program of conducting focused exams of almost all newly registered advisers. According to Wyatt, that program has now been expanded to all regions, with the goal of examining all new registrants.
Wyatt explained how OCIE has re-allocated resources to the IA/IC exam side. OCIE has increased its IA/IC exam staff by 20%, in part by reallocating from BD. As it moves more examiners over to IA/IC, OCIE intends to become more dependent on FINRA for broker-dealer exams. It has established a dedicated FINRA inspection team focused on FINRA operations, called the FINRA and Securities Industry Oversight (FISIO), headed by Kevin Goodman, who heads the BD exam program.
Use of data to focus on targeted exams.
Given the relatively low coverage rate for investment advisers, how is OCIE attempting to allocate scarce resources? Through the use of big data and risk focused exams. OCIE has consolidated its technological capabilities within newly created Office of Risk and Strategy (ORS). To select exams, this team helps analyze data from OCIE’s entire registrant population, screen, and arrive at list of firms that, according to Wyatt, “we believe expose investors to the most significant risks.” Before making any contact with registrants, OCIE staff will divide up risk areas and “customize exam toolkits and modules for the scope areas.”
When determining the nature and scope of exams, we understand that the SEC staff looks for outliers in various metrics. OCIE’s private fund exams are the result of targeted data analytics looking at market risks, and taking into account prior exam information, available performance data, fund strategies, holdings and asset concentration, and other information reported on Form PF.
Takeaways for Private Fund Advisers
- With limited staff assigned to the Private Funds Unit, and over 4500 registered private fund advisers, OCIE necessarily needs to take a targeted approach for private fund exams.
- OCIE is analyzing existing data and market trends, and is attempting to identify market changes that might have outsize impact on certain private funds.
- Private fund adviser exams are typically risk-based, relying on OCIE’s data analytics and its determination that the adviser or its advised funds exhibit some “outlier” conduct.