On January 19th, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Securities and Exchange Commission's (the "SEC") Staff of the Division of Investment Management (the "Staff") released a "Study on Enhancing Investment Adviser Examinations" (the "Adviser Examination Study"). The Adviser Examination Study examines trends in investment adviser registrations and examinations over the past six years and predicts upcoming developments in investment adviser registration. The Staff concludes that the SEC currently does not have the resources or capacity to conduct effective examinations of registered investment advisers.

The Adviser Examination Study notes that the number of registered investment advisers has grown substantially over the past six years. Between October 1, 2004 and September 30, 2010, there was a 38.5 percent increase in the number of registered investment advisers--from 8,581 to 11,888. Additionally, the amount of assets managed by registered investment advisers has grown from $24.1 trillion to $38.3 trillion--a 58.9 percent increase. However, despite the marked increase in the number of registered investment advisers and the amount of assets managed by such advisers, the SEC has not been appropriated additional resources. The SEC examines registered investment advisers through its Office of Compliance Inspections and Examinations (the "OCIE"). Between October 2004 and September 2010, the number of OCIE staff charged with examining registered investment advisers decreased 3.6 percent, and the number of examinations of registered investment advisers conducted per year decreased by 29.8 percent. Based on the rate at which registered investment advisers were examined in 2010, an investment adviser could expect to face examination less than once every 11 years, on average. Additionally, in the wake of the enactment of the Dodd-Frank Act (and the rules promulgated pursuant to the Dodd-Frank Act), the Staff predicts a short-term decrease in the number of registered investment advisers, to be followed by an increase in the number of registered investment advisers, mimicking what occurred after the enactment of the National Securities Markets Improvement Act of 1996.

Based on its prediction of an overall increase in the number of registered investment advisers, and considering the other obligations imposed on the SEC under the Dodd-Frank Act, the Staff concludes that the SEC likely will not have the capacity or resources to conduct adequate and effective examinations of registered investment advisers. To address this problem, the Adviser Examination Study sets forth three possible solutions. One, the SEC could rely on funds appropriated by the federal government, to be supplemented by user fees imposed on registered investment advisers. Following this approach would allow for the experienced OCIE staff to continue to conduct examinations and further, allow the OCIE to use its wealth of knowledge to improve the examination process. Two, Congress could authorize a self-regulatory organization (or several) to conduct examinations of registered investment advisers. Self-regulatory organizations ("SROs") are privately-funded entities, and such resources could support increased examinations; however, the SEC still would need to direct at least some of its resources to overseeing the SROs. Three, the Exchange Act of 1934 could be amended to allow the Financial Industry Regulatory Authority to examine all dual registrants--that is, its members that are "dually" registered as both broker-dealers and investment advisers--which would allow the SEC to divert the funds it uses to examine such advisers to other examinations. However, among other concerns, there is a potential for different (and possibly inconsistent) approaches to examination arising from two separate entities performing such examinations.