SEC Publishes 2016 Examination Priorities | Practical Law

SEC Publishes 2016 Examination Priorities | Practical Law

The SEC's Office of Compliance Inspections and Examinations (OCIE) published its examination priorities for 2016.

SEC Publishes 2016 Examination Priorities

Practical Law Legal Update w-001-3051 (Approx. 5 pages)

SEC Publishes 2016 Examination Priorities

by Practical Law Corporate & Securities
Published on 12 Jan 2016 • USA (National/Federal)
The SEC's Office of Compliance Inspections and Examinations (OCIE) published its examination priorities for 2016.
On January 11, 2016, the SEC's Office of Compliance Inspections and Examinations (OCIE) published its examination priorities for 2016. The priorities generally reflect practices and products that OCIE believes may present heightened risk to investors and to the integrity of the US capital markets. OCIE's 2016 priorities cover three broad areas:
  • Protecting retail investors and investors saving for retirement.
  • Assessing market-wide risks.
  • Using data analytics to identify signals of potential illegal activity.

Protecting Retail Investors and Investors Saving for Retirement

OCIE plans to conduct examination initiatives related to:
  • ReTIRE. Launched in June 2015, ReTIRE is a multi-year examination initiative focusing on SEC-registered investment advisers and broker-dealers, and the services they offer to investors with retirement accounts. This initiative includes examining the reasonable basis for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.
  • Exchange-traded funds. OCIE will:
    • examine exchange-traded funds for compliance with applicable exemptive relief under the Exchange Act and the Investment Company Act of 1940, and with other regulatory requirements;
    • review the unit creation and redemption process of ETFs; and
    • focus on sales strategies, trading practices, and disclosures involving ETFs, including excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs.
  • Branch offices. OCIE will continue to review the supervision of registered representatives and investment adviser representatives in branch offices of SEC-registered investment advisers and broker-dealers.
  • Fee selection and reverse churning. OCIE will continue to examine investment advisers and dually registered investment adviser/broker-dealers that offer investors a variety of fee arrangements, focusing on:
    • recommendations of account types; and
    • whether the recommendations are in the best interest of the retail investor at both the start of the arrangement and afterwards.
  • Variable annuities. OCIE will assess the suitability of sales of variable annuities to investors, the adequacy of disclosure, and the supervision of sales.
  • Public pension advisers. OCIE will examine advisers to municipalities and other government entities, focusing on pay-to-play and other key risk areas related to advisers to public pensions, including identification of undisclosed gifts and entertainment.

Assessing Market-Wide Risks

Other areas of focus include:
  • Cybersecurity. Following the September 2015 launch of its second initiative to examine cybersecurity compliance and controls of broker-dealers and investment advisers, OCIE will advance these efforts, which include testing and assessments of firms' implementation of procedures and controls.
  • Regulation Systems Compliance and Integrity (SCI). OCIE will examine SCI entities to evaluate whether they have established, maintained, and enforced written policies and procedures reasonably designed to ensure the capacity, integrity, resiliency, availability, and security of their SCI systems.
  • Liquidity controls. OCIE will examine:
    • advisers to mutual funds, ETFs, and private funds that have exposure to potentially illiquid fixed income securities; and
    • registered broker-dealers that have become new or expanding liquidity providers in the marketplace.
  • Clearing agencies. As required by the Dodd-Frank Act, OCIE will continue to conduct annual examinations of clearing agencies that are designated systemically important.

Using Data Analytics to Identify Signals of Potential Illegal Activity

OCIE will also focus on:
  • Recidivist representatives and their employers. OCIE will continue to use its analytic capabilities to identify individuals with a track record of misconduct and to examine the firms that employ them.
  • Anti-money laundering (AML). OCIE will continue to:
    • examine the AML programs of clearing brokers and introducing broker-dealers, with a focus on firms that have not filed the number of suspicious activity reports (SARs) that would be consistent with their business models, or that have filed incomplete or late SARs.
    • assess broker-dealers' AML programs, with an emphasis on the adequacy of the independent testing obligation, and the extent to which firms consider and adapt, as appropriate, their programs to current money laundering and terrorist financing risks.
  • Microcap fraud. OCIE will continue to examine the operations of broker-dealers and transfer agents for activities that indicate they may be engaged in, or aiding and abetting, pump-and-dump schemes or market manipulation. OCIE will also assess whether broker-dealers are complying with their obligations under the federal securities laws when publishing quotes for, or trading securities in, the over-the-counter markets.
  • Excessive trading. OCIE will continue to analyze data, including data obtained from clearing brokers, to identify and examine firms and their registered representatives that appear to be engaged in excessive or otherwise potentially inappropriate trading.
  • Product promotion. Another area of focus will be on detecting the promotion of new, complex, and high risk products, and related sales practice issues, to identify potential suitability issues and potential breaches of fiduciary obligations.

Other Initiatives

Other areas of concentration will include:
  • Municipal advisors. OCIE will continue to conduct examinations of newly-registered municipal advisors to assess their compliance with recently adopted SEC and Municipal Securities Rulemaking Board (MSRB) rules.
  • Private placements. OCIE will review private placements, including offerings under Regulation D or the Immigrant Investor Program to evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.
  • Never-before-examined investment advisers and investment companies. OCIE will continue conducting examinations of selected registered investment advisers and investment company complexes that it has not previously examined.
  • Private fund advisers. OCIE will examine private fund advisers, maintaining a focus on fee and expenses. It will also evaluate, among other things, the controls and disclosure associated with side-by-side management of performance-based and purely asset-based fee accounts.
  • Transfer agents. OCIE will examine transfer agents regarding:
    • timely turnaround of items and transfers, recordkeeping and record retention, and safeguarding of funds and securities; and
    • the provision of paying agent services for their issuers, focusing on the safeguarding of security-holder funds.