SEC Publishes 2017 Examination Priorities

The SEC's Office of Compliance Inspections and Examinations (OCIE) published its examination priorities for 2017.

Practical Law Corporate & Securities

On January 12, 2017, the SEC's Office of Compliance Inspections and Examinations (OCIE) published its examination priorities for 2017 for broker-dealers ( www.practicallaw.com/3-383-2168) and investment advisers ( www.practicallaw.com/1-386-4481) . The priorities generally reflect practices, products, and services that OCIE believes may present heightened risk to investors and to the integrity of the US capital markets. OCIE's 2017 priorities cover three broad areas:

  • Protecting retail investors.

  • Focusing on risks specific to elderly and retiring investors.

  • Assessing market-wide risks.

 

Protecting Retail Investors

OCIE plans to conduct examination initiatives related to:

  • Electronic investment advice. OCIE will examine SEC-registered investment advisers and broker-dealers that offer services through automated or digital platforms, including:

    • "robo-advisers" that primarily interact with clients online; and

    • firms that use automation as a component of their services while also offering clients access to financial professionals.

    These exams will likely focus on:

    • registrants' compliance programs;

    • marketing;

    • formulation of investment recommendations;

    • data protection; and

    • disclosures relating to conflicts of interest.

    OCIE will also review firms' compliance practices for overseeing algorithms that generate recommendations.

  • Wrap fee programs. OCIE will expand its focus on registered investment advisers and broker-dealers associated with wrap fee programs, which charge investors a single bundled fee for advisory and brokerage services. OCIE plans to review whether investment advisers are:

    • acting in a manner consistent with their fiduciary duty; and

    • meeting their contractual obligations to clients.

    Areas of interest may include:

    • wrap account suitability;

    • effectiveness of disclosures;

    • conflicts of interest; and

    • brokerage practices.

  • Exchange-traded funds. OCIE will continue to:

  • Never-before examined investment advisers. OCIE will expand its Never-Before Examined Adviser initiative to include focused, risk-based examinations of:

    • newly-registered advisers; and

    • select advisers that have been registered for a longer period but have never been examined by OCIE.

  • Recidivist representatives and their employers. OCIE will continue to:

    • identify individuals with a track record of misconduct; and

    • examine the investment advisers that employ them.

    For example, it will assess the compliance oversight and controls of investment advisers that have employed these individuals, including those who have been subject to a regulatory action or barred from associating with a broker-dealer.

  • Multi-branch advisers. OCIE will also continue to focus on registered investment advisers that provide advisory services from multiple locations, as a branch office model can pose unique risks and challenges to advisers.

  • Share class selection. Another focus will be on conflicts of interest and other factors that may affect registrants' recommendations to invest, or remain invested, in particular share classes of mutual funds. For example, OCIE will identify and assess conflicts that certain investment advisory personnel may have, such as those who also are registered representatives ( www.practicallaw.com/w-000-6420) of a broker-dealer, which may influence recommendations in favor of share classes that have higher loads or distribution fees. OCIE will also assess the formulation of investment recommendations and the management of client portfolios.

 

Focusing on Senior Investors and Retirement Investments

OCIE also plans to focus on:

  • ReTIRE. Launched in June 2015, ReTIRE is a multi-year examination initiative focusing on registered investment advisers and broker-dealers, and the services they offer to investors with retirement accounts. In 2017, these examinations will likely focus on, among other things:

    • registrants' recommendations and sales of variable insurance products;

    • the sales and management of target date funds; and

    • controls surrounding cross-transactions, particularly with respect to fixed income securities.

  • Public pension advisers. OCIE will examine advisers to municipalities and other government entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty. It will also review other risks specific to these advisers, including pay-to-play and undisclosed gifts and entertainment practices.

  • Senior investors. OCIE will also evaluate how firms manage their interactions with senior investors, and how well they are able to identify financial exploitation of seniors. These examinations will likely focus on registrants':

    • supervisory programs; and

    • controls relating to products and services directed at senior investors.

 

Assessing Market-Wide Risks

Other areas of focus will include:

  • Money market funds. OCIE will examine money market funds for compliance with the SEC's 2014 rule amendments governing money market funds, which took effect in October 2016. These examinations will likely include:

    • assessments of the boards' oversight of the funds' compliance with the new amendments; and

    • review of compliance policies and procedures relating to stress testing and funds' periodic reporting to the SEC.

  • Payment for order flow. OCIE will examine select broker-dealers, such as market-makers and those that serve primarily retail customers, to assess how they are complying with their duty of best execution when routing customer orders for execution.

  • Clearing agencies. As required by the Dodd-Frank Act ( www.practicallaw.com/4-502-8619) , OCIE will continue to conduct annual examinations of clearing agencies that are designated systemically important.

  • FINRA. In addition to continuing to conduct inspections of FINRA's ( www.practicallaw.com/1-382-3462) operations and regulatory programs, OCIE will focus resources on assessing the quality of FINRA's examinations of individual broker-dealers.

  • Regulation Systems Compliance and Integrity (SCI). OCIE will continue to 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. In addition, OCIE will review:

    • controls relating to how systems record the time of transactions or events;

    • how systems synchronize with other systems;

    • collection, analysis, and dissemination of market data; and

    • enterprise risk managements, including whether these programs cover appropriate business units, subsidiaries, and related interconnected infrastructure.

  • Cybersecurity. OCIE will also continue its initiative to examine for cybersecurity compliance procedures and controls of broker-dealers and investment advisers, including testing the implementation of those procedures and controls.

  • National securities exchanges. In 2017, OCIE will continue to conduct risk-based inspections of the national securities exchanges, which will focus on selected operational and regulatory programs.

  • Anti-money laundering (AML). OCIE will continue to:

    • assess whether the AML programs of broker-dealers are tailored to specific risks that a firm faces, including whether broker-dealers consider and adapt their programs, as appropriate, to current money laundering and terrorist financing risks;

    • review how broker-dealers are monitoring for suspicious activity at the firm, in light of the risks presented, and the effectiveness of independent testing; and

    • assess broker-dealers' compliance with suspicious activity report (SAR) requirements and the timeliness and completeness of SARs filed.

 

Other Initiatives

Other areas of concentration will include:

  • Municipal advisors. OCIE will continue to conduct examinations of municipal advisors ( www.practicallaw.com/w-005-0121) to assess their compliance with SEC and Municipal Securities Rulemaking Board (MSRB) rules. This initiative will continue to include industry outreach and education.

  • Transfer agents. OCIE will examine transfer agents ( www.practicallaw.com/8-382-3741) :

    • regarding timely turnaround of items and transfers, recordkeeping and record retention, and safeguarding of funds and securities; and

    • that service microcap issuers, focusing on detecting issuers that may be engaging in unregistered, non-exempt offerings of securities.

  • Private fund advisers. OCIE will also continue to examine private fund advisers, focusing on conflicts of interest, disclosure of conflicts, and any actions that appear to benefit the adviser at the expense of investors.

 
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