New York - March 23, 2011 - The Securities and Exchange Commission (SEC) faces a looming processing crunch as alternative asset managers required to register by July 21, 2011 appear to be dragging their heels, which will lead to an expected last minute wave of filings at the SEC deadline.
Research conducted by ICS Compliance of publicly available information from the SEC shows that between October 1 and December 31, 2010, only 213 new managers have been become approved Registered Investment Advisors (“RIA”). In a universe of over 7,000 funds, including hedge funds and fund of funds, approximately 2,500 managers are expected to register with the SEC, taking into account many single managers that may have avoided thresholds when this was first attempted in 2006 who now have no choice by to register, since the minimums are lower and operating with a two-year lock-up is no longer a means of exemption.
“Given that filings are averaging about 100 a month, we would expect the SEC to be flooded with new registrants come May of this year as managers rush to make the forty five day deadline,” said Gary Swiman, President of ICS Compliances, Asset Management Group. “Quoting an SEC officer with whom we spoke, they are clearly facing a management challenge.” The agency will be hard pressed to find and deploy what ICS believes is an additional 200 examiners beyond what the 2011 Congressional Budget Request is asking for, Swiman added.
“There is also the question of the initial examination (audit) that the SEC is required to perform when a fund registers,” said Swiman. New registrants should expect to be examined by the SEC’s internal staff within one year. The agency takes a risk-basis approach with the biggest investment managers on one to two year investment cycles, under the assumption that by focusing on the fund managers with the most assets under management more investors will be protected. Though with only 30 New Examination spots and 15 New Risk Assessment FTE’s requested in the Fiscal 2011 budget, it appears highly unlikely that the SEC will be moving quickly, especially against smaller managers that could pose the greatest risk to investors.
The SEC’s New York and Boston offices, which oversee New Jersey and Connecticut respectively, as well as their own states, are expected to be the hardest hit as the majority of hedge funds fall into their jurisdiction. By its own admission, “Between fiscal years (FY) 2005 and 2007, the SEC experienced three years of flat or declining budgets, losing 10 percent of its employees and severely hampering key areas such as the agency’s enforcement and examination programs” which is a direct quote from the SEC Congressional Budget Justification Brief for fiscal year 2011”, the SEC seems to waiving the white resource flag already.
In fact back in 2005 the SEC said that it expected to see an 8% to 15% increase in its pool of registered investment advisors. It now says that since 2005, the number of investment advisers registered with and overseen by the SEC has grown by 32 percent. Currently the SEC estimates and an increase of just 10% to 12% from its September 2010 level of 10,313 registered firms, believing that nearly 50% of all hedge fund and fund of fund managers are already registered. ICS believes this figure is vastly under estimated and the increase will be in the 20-25% range.
“We really don’t believe the SEC has seen the wave hit them yet”, says Swiman. “We were surprised to see that many established players, several recognizable multi-billion dollar hedge fund and fund of fund managers are not on the IARD list of names,” he said. And those that are dealing with, either first or second examinations at this point as the SEC still tries to figure how to address the issue of containing what it calls “systematic risk” by going after the big guys first. "The registration form isn't where you catch bad people. The examination process is where you catch bad people," says Swiman.
About ICS Compliance
ICS Compliance is the leading financial services compliance consultancy in the United States. With our 150 professionals operating in 16 states, we have proudly advised over 900 financial institutions during our 14-year history. ICS Compliance serves, Registered Investment Advisors, Broker-Dealers, Hedge Funds, Alternative Asset Managers, Community Banks, International Banks, Credit Unions, Bank Holding Companies, and De Novo Banks with a broad range of services including: compliance risk assessment, SEC/FINRA/FDIC/BHC compliance program development and administration, BSA compliance, anti-money laundering, CRA compliance, fair lending, technology compliance, and mortgage quality control.
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