SEC Announces 2018 Examination Priorities
Earlier this month the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its examination priorities for 2018. The priorities reflect certain practices and products that OCIE perceives to present potentially heightened risk to investors and/or the integrity of our capital markets. The OCIE examines SEC-registered entities with the aim to promote compliance, prevent fraud, identify risk and inform policy. The key points of the OCIE’s priorities for 2018 are summarized below.
Protection of retail investors, including seniors and those saving for retirement
- Particular focus will be given to proper disclosure of the costs of investing (including fees, expenses and other less apparent charges) as well as conflicts of interest that might provide incentives for firms to recommend higher cost or riskier products. SEC examiners will also review fees charged to advisory accounts, especially where the fee is dependent on the value of the account, to determine whether assets are valued in accordance with investor agreements, disclosures and the firm’s policies.
- Electronic delivery systems, including automated or digital platforms and “robo-advisers”, will continue to be examined, with a focus on SEC registrants’ compliance programs (including oversight of advisers’ computer program algorithms), marketing materials, investor data protection and conflict disclosure.
- Wrap fee programs continue to attract interest, including whether advisers are acting in a manner both consistent with their fiduciary duty and in accordance with their contractual obligations to their clients.
- Newly registered and never-before-examined advisers will be evaluated and those with elevated risk profiles are more likely to be examined.
- The SEC will continue to examine investment advisers and broker-dealers who offer products and services directed toward seniors and investors with retirement accounts, focusing on, among other things, variable insurance products and target date funds.
- Increased focus will be given to mutual funds and ETFs as they are the primary investment vehicles for retail investors. Specifically, the SEC will focus on mutual funds (i) that have experienced poor performance or liquidity relative to their peer group, (ii) that are managed by advisers with little experience in managing risk or (iii) that hold securities that are difficult to value during times of market stress. Focus will also be given to conflicts associated with ETFs that track indexes, as well as those ETFs with little secondary market trading volume and heightened risk of being delisted and having to liquidate assets.
- Municipal advisors that provide advice to, or on behalf of, a municipal entity or obligated person about the issuance of bonds and other financial products will continue to be of significant interest
- Best execution by broker-dealers for both municipal bond and corporate bond transactions will continue to be a point of emphasis by OCIE.
- The significant growth and risks inherent in the cryptocurrency and ICO markets will continue to be monitored with an emphasis on the existence of adequate controls and safeguards and disclosure about the risks associated with these investments.
Compliance and risks in critical market infrastructure
- The SEC will continue its annual examination of clearing agencies that the Financial Stability Oversight Council has designated as systematically important and for which the SEC is the supervisory agency.
- National securities exchanges will continue to draw OCIE’s attention, with specific focus on the exchanges’ internal audits, fees paid under the Exchange Act, Section 31, and the governance and operation of certain National Market Systems (NMS) plans.
- The SEC will examine transfer agents with a focus on transfers, recordkeeping, and the safeguarding of funds and securities. Candidates for examination will include transfer agents that serve as paying agents or that service microcap or crowdfunding issuers.
- The SEC will continue to examine Systems Compliance and Integrity (SCI) entities to evaluate whether they have effectively implemented the written policies and procedures required under Regulation SCI, adopted by the SEC in November 2014 to strengthen the technology infrastructure of the U.S. Securities markets.
Focus on finra and msrb
- In recognition of FINRA’s role as a primary regulator of the overwhelming majority of SEC-registered broker-dealers, OCIE’s continuing examination of FINRA will focus on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors also registered as broker-dealers;
- In recognition of the MSRB’s authority to regulate broker-dealers that buy, sell and underwrite municipal securities, and municipal advisors, OCIE will examine the MSRB to evaluate the effectiveness of operational and internal policies, procedures and controls.
- OCIE will make cybersecurity a priority in each of its examinations with specific areas of inquiry to include governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
Anti-money laundering programs
- OCIE will continue to focus on examining whether those SEC regulated entities that are required by regulations adopted under the Bank Security Act to establish anti-money laundering programs are appropriately adapting their (AML) programs to address their obligations. Items to be covered will include implementation of the customer due diligence requirement and whether subject entities are filing timely, complete and accurate Suspicious Activity Reports (SARs) and conducting appropriate independent tests of their AML programs.
The complete description of OCIE priorities can be found at: http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2018.pdf. The description of priorities is not exhaustive and the staff will also conduct examinations focused on risks, issues, and policy matters that arise from market developments, new information learned from examinations or other sources, including tips, complaints, and referrals, and coordination with other regulators.
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02.14.2018 | PUBLICATION: BulletPoint | TOPICS: Investment Management, Securities | INDUSTRIES: Wealth Management, Private Investment Funds