RIA Compliance Blog
As part of its overall goal to increase its ability to examine registered investment advisers, earlier this month the Security and Exchange Commission (“SEC”) announced that it has created a new office within the Office of Compliance Inspections and Examinations (“OCIE”) designed to consolidate the SEC’s current operation in the area of market surveillance, quantitative analysis and risk assessment. The newly created office — the Office of Risk and Strategy — will also provide operational risk management and organizational strategy for OCIE. The SEC also announced that it had selected Peter B. Driscoll to lead the new Office of Risk and Strategy. He will manage members of the investment advisor/investment company examination staff dedicated to the new office.
The SEC currently examines annually about 10% of all 11,000 registered investment advisers. The newly created Office of Risk and Strategy is part of a series of steps designed to heighten RIA oversight. The SEC has announced that it plans to in increase the number of examiners of investment advisers by almost 20% this year, bringing the number to 630. Informally, commissioners have also suggested that the Commission may require RIAs to hire third parties to conduct private compliance reviews.
For many years, and to an increasing degree over the past few years, the SEC’s examination program has been driven by risk evaluations derived in part from data-driven surveillance and reviews. According to the director of OCIE, Marc Wyatt, the new Office of Risk and Strategy will lead the SEC’s existing risk-based, data-driven exam program in a way which he describes will bring a “transparent approach to protecting investors.”
The SEC implemented new data gathering and analysis initiatives in 2012, with the launch of MIDAS and CAT. MIDAS — an acronym for Market Information Data Analytics System — captures all securities transaction orders posted on the national exchanges, including modifications, cancellations, executions, and other transactions. Former SEC Chairman Elise Walter described MIDAS as “the world’s greatest data sandbox,” which the SEC would use to monitor and understand illegal behavior, flash crashes and generally to provide insight into the way the market functions. Using MIDAS the SEC can both address systemic risks and other overall market concerns, and monitor trends over time, according to Walters. CAT — an acronym for Consolidated Audit Trail — captures non‑public data including the identities of parties to the particular trades that are executed on the exchanges.
In a speech given in February, 2013, Chairman Walter claimed that the SEC was “using technology not just to make us stronger, but to help make investors and other market participants smarter”. She claimed that the technology that the SEC was bringing online allowed the SEC to leverage its personnel to both cover more territory to uncover fraud and other rule violations and to target the SEC’s efforts more precisely. She indicated that, at the time, there were approximately 4,000 SEC employees overseeing more than 35,000 public companies, exchanges, investment advisors, broker dealers, hedge funds and other market participants.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.