Resources/ Updates


RIA Third-Party Exams ~ and Other SEC Maybes

New rulemaking governing investment adviser examinations is advancing on the mission list of the Securities and Exchange Commission (“SEC”). According to David Grim, Director of the SEC’s Division of Investment Management, in addition to Form ADV changes the “Division” is working on an initiative concerning potential rulemaking for the third-party compliance reviews of registered investment advisers (“RIAs”).

Third-Party Compliance Reviews of RIAs

Division staff,along with members of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will  develop a recommendation to establish a program of third-party compliance reviews for RIAs to supplement OCIE reviews to enhancement compliance by RIAs.

SEC Commissioner, Daniel M. Gallagher, covered the rationales for this development in his conference remarks at the Rocky Mountain Securities Conference on May 9, 2014. “There are nearly three times as many investment advisors registered with the SEC than there are broker dealers…due in large part to unfunded mandates imposed upon the SEC by Title IV of Dodd-Frank…there is no SRO interposed between the adviser industry and the SEC like there is for broker-dealers…I worry that this has created the unfortunate side effect of underreported investment adviser rule violations, inappropriately skewing our enforcement statistics by revealing a disproportionate amount of problems on the broker-dealer side…One way to address this imbalance would be to provide for third party examiners of investment advisers—including, potentially, defining the term “third party” to include SROs in order to allow the SROs currently involved in broker-dealer oversight to conduct examinations of “dual hatted” investment advisors as well.”

Pros and Cons of Third-Party Audits:

Pros: Per the SEC Agency Financial Report 2014, it only audited 8-10% of all RIAs in each of the past five years. Congress has not agreed to allocate additional funding toward RIA exams. Industry compliance consulting firms could assume this examination task, freeing SEC resources toward the RIAs posing greater risk.

Cons: The cost could be prohibitive for some firms. Third-party examiners would require SEC oversight. Exam standards suited to varied RIA structures do not currently exist for third-party examiners. And the need for a self- regulating organization to supervise RIAs might prove more urgent.

Other Adviser Initiatives

The Division is also working on initiatives towards other new rulemaking in the areas of: RIA business disruption plans and stress testing for large RIAs and RICs (Registered Investment Companies).

Transition Plans for Investment Advisers:

The Division is considering a new requirement that RIAs create and maintain transition plans to prepare for a major disruption in their business, including a major event in the market, dissolution of the adviser, or losing a key adviser member.

Mary Jo White, SEC Chairwoman, addressed this topic on December 11, 2014, “…it is important to recognize that the risks associated with winding down an investment adviser are different than those associated with other kinds of financial firms.  Client assets are not the assets of an adviser, and advisers routinely exit the market without significant market impact; those exits, however, are not without challenges… a clear transition plan for that adviser could benefit investors and the market.”

Stress Testing for Large RIAs and RICs:

The Division is considering a new requirement for stress testing by large investment advisers and large investment companies to implement section 165(i) of the Dodd Frank Act.

Chairwoman White also stated last December, “Stress testing is an important tool routinely used by banking regulators.  Implementing this new mandate in asset management, while relatively novel, will help market participants and the Commission better understand the potential impact of stress events.  Building on what we have learned about stress testing through money market reform, the staff is evaluating what protocols would be appropriate for investment advisers and investment companies.”

RIAs and Advising

Protecting investors through the regulation of RIAs “is a crucial role of the Division.”  As of October 1, 2015, there were 11,986 RIAs reporting approximately $66.9 trillion in regulatory assets under management—an 8 percent jump from the start of fiscal year 2015.  Per Director Grim’s testimony, here’s the breakdown on investment advice:

  • About 60 percent of RIAs advise to individuals.
  • About 37 percent of RIAs advise to 29,000 private funds with gross assets of about $10.4 trillion.
  • About 3,047 exempt reporting advisers manage over 10,000 private funds accounting for $2.3 trillion. 

The Mission

The SEC’s mission is three fold: to protect investors; to maintain fair, orderly and efficient markets; and facilitate capital formation. “The Division promotes this mission through regulating the asset management industry. A primary function of the Division is to administer the Investment Company Act of 1940 (Investment Company Act) and Investment Advisers Act of 1940 (Investment Advisers Act) and to develop regulatory policy for both investment companies – including mutual funds, closed-end funds, business development companies, unit investment trusts (UITs), and exchange-traded funds (ETFs) – and investment advisers, all of which play a major role in the lives of Americans and our national economy.” 

Related Documents

Testimony on “Oversight of the SEC’s Division of Investment Management” ~ Oct 23, 2015

SEC 3rd Party RIA Compliance Exams or a Shift to State Regulation ~ Jan 8, 2015

Commissioner Gallagher Remarks at the 46th Annual rocky Mountain  Securities Conference ~ May 9, 2014

Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry ~ Dec 11, 2014

The SEC Agency Financial Report 2014


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