Audits for RIAs less frequent, tougher and ‘kind of mean’

Dodd-Frank will lead to changes in the SEC’s adviser exam program, according to Robert Stype, managing partner at ACA Compliance Group.

The financial-reform law directs the SEC’s Division of Investment Management to perform examinations of advisers, Mr. Stype, a former Securities and Exchange Commission examiner, said during a presentation last week at the Schwab conference.

Currently, the SEC’s Office of Compliance Inspections and Examinations performs audits.

“The [adviser] audit is not going to go away,” said Mr. Stype, who worked in the OCIE unit.

Exams have changed as a result of the Bernard Madoff scam and other frauds, he said. Exam cycles have lengthened from five years to six or seven, and new advisers might not be examined for two or three years because the SEC is looking for problems at firms with higher risk profiles, Mr. Stype said.

Eight to nine percent of adviser exams result in referrals to the SEC’s Division of Enforcement now, Mr. Stype said, up from about 5% historically. The SEC examiners are “really kind of mean now,” he quipped.

Advisers should also be prepared for the SEC to contact clients for asset verification purposes, Mr. Stype said.

If the Financial Industry Regulatory Authority Inc. took over adviser oversight, “Finra would definitely be doing more routine inspections,” he said.

Advisers with less than $100 million in assets, who will transition to state oversight under Dodd-Frank, will face a mixed bag of exam cycles, Mr. Stype said. Some states have active oversight programs, but othersdon’t actually perform audits on advisers, he said in an interview.

E-mail Dan Jamieson at djamieson@investmentnews .com.