No one loves to be audited, but for most investment advisors it’s not something they have to worry about often. The Securities and Exchange Commission only examines 9 percent of its registrants per year. Forty percent of advisors have never gone through an SEC examination.
But Jane Jarcho, head of exams for investment advisors and investment companies, is trying hard to change that.
Jarcho has been at the SEC for 24 years, most recently as associate director of the exam program in the Chicago regional office. Her name might never have come onto the radar if it weren’t for the fact that the SEC had stated its priority for 2014 was to examine previously unexamined advisors. That falls on Jarcho’s shoulders.
Jarcho’s biggest challenge may be getting more resources to make that happen. The SEC and the White House had requested a $1.7 billion budget for fiscal year 2015, which would allow the agency to hire 250 additional examiners. Last month, the House of Representatives passed a budget of $1.4 billion. Meanwhile, the Senate Appropriations Subcommittee on Financial Services and General Government approved the full budget they requested.
For Jarcho, extra examiners may be nice, but she’s not counting on it.
“I don’t expect to see significant hiring resources come Oct. 1, with the new fiscal year,” she says. “It sounds clichéd, but we’re always trying to figure out how to work smarter” with the almost 400 examiners around the country that she does have.
That’s going to mean a change in how they approach an audit, she says. Instead of going into an advisor’s office with a comprehensive checklist, Jarcho’s team will focus primarily on areas of the practice that have been deemed high-risk. The agency uses analytics to point to areas that could be a problem at certain types of registrants.
“With our limited resources we can’t afford to spend time on areas that are not high-risk,” she says.
Even with a high-risk focus, Jarcho says the program can’t get to all of the 11,000 registrants yearly.
Commissioner Daniel Gallagher has suggested a rule that would require advisors to hire third party auditors, but “we feel strongly that the best suggestion is to get us more resources,” Jarcho says.
Cybersecurity is another priority. The agency is currently conducting a sweep of more than 50 broker/dealers and advisors to gather information on firms’ cybersecurity practices. Jarcho says OCIE will share the results of the sweep with the SEC’s policy divisions, commissioners and Chairman Mary Jo White.
“The largest registrants recognize the risks, and have put money into this,” she says. “I think the smaller ones are struggling with, ‘How do I do this?’”
