RIA audits less frequent, tougher and ‘kind of mean’

Dodd-Frank will be leading 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 today at The Charles Schwab Corp.’s Impact conference.
Currently, the SEC’s Office of Compliance Inspections and Examinations performs audits.
“I haven’t heard if OCIE would be folded into [the Division of Investment Management],” he said, but the OCIE’s exam functions will continue.
“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 and other frauds, he said.
“Routine exams are not happening near as much as they used to,” he said. Exam cycles have lengthened from five years to six or seven years, and new advisers might not be examined for two or three years, he said.
That’s because the SEC is looking for problems at firms with higher risk profiles.
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.
“They’re really kind of mean now,” he said of the SEC examiner mentality.
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 added.
Advisers with under $100 million in assets, who will be transitioning to state oversight under Dodd-Frank, will face a mixed bag of exam cycles, Mr. Stype said.
Some states have active oversight programs, but others, like New York, don’t actually perform audits on advisers, he told InvestmentNews.