On February 12, 2018, the U.S. Securities and Exchange Commission (“SEC”) released its Fiscal Year 2019 Congressional Budget Justification and Annual Performance Plan, combined with its Fiscal Year 2017 Annual Performance Report. In reading through the budget request and the annual performance report, we have noted the following:
- Hiring freeze would be lifted and 100 positions would be restored
The SEC has asked for a $1.658 billion budget for FY 2019 to support its core mission and to enable the agency to expand oversight and enforcement in emerging areas such as financial innovation, market structure, and cybersecurity. This budget would allow the SEC to support 4,628 positions. At the start of FY2017, the SEC imposed a hiring freeze that will continue through FY2018. There are few exceptions to the freeze, and as a result the agency expects that staffing will decline to 4,528 positions by the end of the current fiscal year. The SEC is seeking to restore 100 positions, which is approximately one-fourth of the positions lost during the hiring freeze.
- OCIE requesting resources to keep pace with investment adviser population
The Office of Compliance Inspections and Examinations (“OCIE”), which directs the SEC’s National Examination Program, is requesting 24 of those positions to partially restore losses in staffing. 13 of these positions would focus on investment adviser and investment company examinations. The SEC stated that nearly 35% of all registered investment advisers have never been examined and the population of advisers registered with the SEC continues to grow. By the end of FY2019, the SEC estimates that there will be 20 investment advisers per staff member. The SEC’s request states that significant additional resources are necessary to improve the examination coverage of registered advisers.
- Over 15% of investment advisers were examined in 2017 and the SEC looks to meet this again
The SEC’s FY2017 goal for examinations of investment advisers was 13%. This goal was exceeded and 15% of investment advisers were examined during the year, for a total of 2,114 examinations. The SEC estimates that the percentage of advisers that will be examined in FY2018 and FY2019 will remain at 15%. With the expected growth in the registered adviser population, it is estimated that this will mean 2,120 exams in FY2018 and 2,160 exams in FY2019.
- 72% of exams in FY2017 identified deficiencies
FY2017, 72% identified deficiencies. Deficiencies may vary, with some being technical deficiencies, while others may be more significant. The SEC deems deficiencies that may cause harm to clients, that have a high potential to cause harm, or that are recidivist misconduct to be significant findings. 20% of the FY2017 examinations identified significant findings. 7% of the examinations resulted in referrals to the Division of Enforcement.
- 307 enforcement investigations came from tips in FY2017
The SEC receives tips, complaints, and referrals (collectively, “tips”) on an ongoing basis. The SEC will analyze these tips, which may lead to a cause exam. During FY2017, the SEC conducted 177 cause exams that resulted from tips. Tips can also result in an enforcement investigation. 307 enforcement investigations were the result of tips during FY2017.
The SEC's Examination Program is Not Slowing Down – What You Should Know
The SEC’s examination program does not appear to be slowing down. OCIE is working to keep pace with the investment adviser population and maintain its examination coverage. Not only is the population growing, but the investment advisers are increasingly larger and more complex. OCIE plans to continue improving its analytic, surveillance, and risk assessments in FY2019 by leveraging the vast amount of data and information that is available to the examination program.
Investment advisers should ensure that they are ready for an SEC exam, particularly if they have never been examined or have not been examined in several years. In addition, advisers should ensure that the information being analyzed by the SEC in disclosures and filings is complete and accurate.
About the Author
Jami Jack currently serves as Director of ACA’s private equity practice. In this position, Jami specializes in SEC compliance for advisers to private equity funds including, real estate and venture capital funds. Jami also provides a wide variety of regulatory compliance consulting services to private equity fund and other investment advisers, including drafting and implementing customized compliance programs, conducting mock SEC examinations and annual compliance program reviews, and assisting clients with SEC examinations. Jami joined ACA in October 2008 as a Principal Consultant in the Washington, DC office and is now based in Dallas, Texas. Prior to joining ACA, Jami spent almost nine years at the Fort Worth Regional Office of the SEC. She worked as a Securities Compliance Examiner/Staff Accountant until March 2007, and then as an Investment Adviser/Investment Company Branch Chief. During her time at the SEC, Jami led or participated in examinations of more than 120 investment advisers, hedge funds, investment companies and variable insurance products. Jami also participated in the SEC’s CCO Outreach program, for which she received the Chairman’s Award of Excellence in 2006. In addition, Jami assisted with the SEC’s new examiner training program. Jami earned a B.A. in Marketing from the University of Central Oklahoma and an MBA from Oklahoma State University and is also a Certified Public Accountant