Well ahead of the New Year, the SEC Office of Compliance Inspections and Examinations (OCIE) announced its 2019 examination priorities. In keeping with OCIE’s four “pillars” of promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy, the Dec. 20 release provides a preview of key areas where OCIE intends to focus its limited resources.
Here is a brief overview of the six themes for OCIE’s 2019 Examination Priorities. We encourage you to read the entire report.
Matters of importance to retail investors, including seniors and those saving for retirement
Fees and Expenses
Disclosure of the costs of investing – OCIE will continue to review fees charged to advisory accounts, ensuring that the fees are assessed in accordance with the client agreements and firm disclosures. With respect to mutual fund share classes, OCIE will continue to evaluate financial incentives for financial professionals that may influence their selection of particular share classes. OCIE remains focused on investment advisers participating in wrap fee programs, which charge investors a single bundled fee for both advisory and brokerage services.
Conflicts of Interest
Examinations will review policies and procedures addressing the following:
a. Use of Affiliated Service Providers and Products
b. Securities-Backed Non-Purpose Loans and Lines of Credit
c. Borrowing Funds from Clients
Senior Investors and Retirement Accounts and Products
OCIE will continue to review the services and products offered to seniors and those saving for retirement. These examinations will focus on, among other things, compliance programs of investment advisers, the appropriateness of certain investment recommendations to seniors, and the supervision by firms of their employees and independent representatives.
Portfolio management and Trading
OCIE will review firms’ practices for executing investment transactions on behalf of clients, fairly allocating investment opportunities among clients, ensuring consistency of investments with the objectives obtained from clients, disclosing critical information to clients, and complying with other legal restrictions.
OCIE will also examine investment adviser portfolio recommendations to assess, among other things, whether investment or trading strategies of advisers are: (1) suitable for and in the best interests of investors based on their investment objectives and risk tolerance; (2) contrary to, or have drifted from, disclosures to investors; (3) venturing into new, risky investments or products without adequate risk disclosure; and (4) appropriately monitored for attendant risks.
Never-Before or Not Recently-Examined Investment Advisers
OCIE will continue to conduct risk-based exams of adviser that have never been examined, newly registered advisers, advisers that have not been examined for a number of years and may have substantially grown assets or changed business models.
Mutual Funds and Exchange Traded Funds
OCIE will focus on risks associated with the following: (1) index funds that track custom-built or bespoke indexes; (2) ETFs with little secondary market trading volume and smaller assets under management; (3) funds with higher allocations to certain securitized assets; (4) funds with aberrational underperformance relative to their peer groups; (5) funds managed by advisers that are relatively new to managing Registered Investment Companies (RICs); and (6) advisers that provide advice to both RICs and private funds with similar investment strategies.
Broker-Dealers Entrusted with Customer Assets
With a focus on compliance with Exchange Act Rule 15c3-3 as well as procedures and controls.
A continuation of exams of broker-dealers involved in selling stocks of companies with market caps under $250 million.
Compliance and risk in registrants responsible for critical market infrastructure:
a. Clearing Agencies
b. Entities subject to Regulation Systems Compliance and Integrity (Regulation SCI)
c. Transfer Agents
d. National Securities Exchanges
Select areas and programs of FINRA and MSRB
Examinations of FINRA will continue to focus on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors that are also registered as broker-dealers. OCIE will continue to conduct inspections of MSRB to evaluate the effectiveness of MSRB’s policies, procedures, and controls.
OCIE will continue to monitor the offer and sale, trading, and management of digital assets, and where the products are securities, examine for regulatory compliance.
OCIE will continue to prioritize cybersecurity in each of its five examination programs. Exams will focus on, among other things, proper configuration of network storage devices, information security governance generally, and policies and procedures related to retail trading information security. Specific to investment advisers, OCIE will emphasize cybersecurity practices at advisers with multiple branch offices, including those that have recently merged with other investment advisers, and continue to focus on, among other areas, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
OCIE will continue to prioritize examining broker-dealers for compliance with their AML obligations, including whether they are meeting their SAR filing obligations, implementing all elements of their AML program, and robustly and timely conducting independent tests of their AML program.
Post written by Director of Retail Wealth Manager Services Korrine Kohm