The Securities and Exchange Commission (SEC) has begun scrutinizing registration documents submitted by investment advisers to uncover misrepresentations they have made regarding their education, assets under management and other aspects of their firm. The intent behind the crackdown is to uncover and address misconduct before it balloons into a threat to investor protection. What action the SEC will take regarding advisers who are found to have filed misleading forms is unclear.
In testimony before the Senate Banking Subcommittee on Securities, Insurance and Investment, Robert Khuzami, Director of the SEC’s Division of Enforcement, stated “If they [advisers with misleading information on their forms] come face to face with inspectors early on…they’re going to know that we’re watching, and they’re going to be unlikely to graduate to larger fraud.”
The SEC faces quite a challenge in carrying out its mission. Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, testified that, in fiscal year 2011 which ended September 30, the SEC conducted examinations of only 8% of the nearly 12,000 registered investment advisers. In addition, approximately 38% of registered investment advisers have never been subjected to an SEC review.