RIA Compliance Blog
The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities Exchange Commission (“SEC”) recently released its Examination Priorities for 2016. These examination priorities provide valuable insight into what OCIE perceives to be the greatest risk to investors and what it will be focusing its efforts on throughout the year. This year its overall goals stayed approximately the same as last year: 1) protecting investors saving for retirement; 2) assessing market-wide risks; and 3) using data analytics to identify and examine illegal activity.
In regards to its goal of protecting investors saving for retirement, OCIE intends to continue its Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) initiative which focuses on the suitability of investment recommendations made to investors, supervision and compliance procedures, conflicts of interest, and marketing practices. It will also continue to review the supervision procedures of branch offices of SEC-registered entities and fee selections which can lead to reverse churning. New areas of focus include exchange-traded funds (“ETFs”) which OCIE intends to examine for compliance with various regulatory requirements. It will focus on sales strategies, trading practices, disclosures, excessive portfolio concentration, and suitability, and will pay particularly close attention to niche or leveraged/inverse ETFs. In addition, variable annuities have become a large part of many investors’ retirement plans and OCIE intends to assess the suitability of these sales as well as the adequacy of disclosures. Lastly, OCIE will examine public pension advisers to ensure these advisers are not engaging in any pay-to-play activities or giving undisclosed gifts in return for appointments or other favors.
In furtherance of its goal of better assessing market-wide risks in order to maintain the integrity of our financial market, OCIE will continue its cybersecurity initiative by continuing to examine the cybersecurity control procedures used by registered broker-dealers and investment advisers. It will advance these efforts by testing and assessing the implementation of these cybersecurity controls. OCIE will also continue its annual examinations of systemically important clearing agencies. New areas of heightened scrutiny will include Systems Compliance and Integrity (“SCI”) entities and liquidity controls. SCI entities are key market participants who must have in place certain policies and procedures to designed to strengthen its technological systems. In 2016 OCIE will examine SCI entities and the policies these entities have established to ensure the capacity, integrity, and resiliency of these systems. Liquidity controls put in place by advisers to mutual funds, ETFs, and private funds, as well as broker-dealers, will be examined to ensure the controls are adequately managing liquidity risk.
OCIE will further its goal of better utilizing data analytics to identify signals of illegal activity by continuing its identification of registered representatives with track records of misconduct and its examination of the firms that employ them. OCIE will also continue to use data analytics to examine anti-money laundering (“AML”) programs by identifying firms who have not filed suspicious activity reports on the same frequency as similarly situated firms and assessing these firms’ AML programs. OCIE will continue to analyze data obtained from clearing brokers for any signs of microcap fraud or excessive trading. OCIE will focus on using data analytics to examine product promotion practices of new, complex, or high risk products and identify potential breaches.
Lastly, OCIE also identified a few miscellaneous areas it wanted to examine more closely, in addition to its overall stated goals, such as newly-registered municipal advisers, private placements, never-before-examined investment advisers, private fund advisers, and transfer agents. These and the above-listed areas are not exhaustive, but merely a preview as to what market participants can inspect to see more closely examined this year.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Visit our website for more information.