RIA Compliance Blog
On December 20, 2018, two days before the recent partial federal government shutdown began, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced its 2019 Examination Priorities. As discussed previously, the shutdown resulted in the SEC operating at a quite minimal level. Now that the shutdown is over, registered investment advisers and broker-dealers can likely expect OCIE to fully implement the following examination priorities.
OCIE listed six examination priorities for 2019: (1) matters of importance to retail investors, especially seniors and investors saving for retirement; (2) compliance and risk in registrants who are tasked with overseeing critical market infrastructure; (3) focus on FINRA and MSRB; (4) digital assets; (5) cybersecurity; and (6) anti-money laundering. According to OCIE, this is not an exhaustive list, and one can expect OCIE to cover other issues in its examinations. However, OCIE has concluded that these issues “present potentially heightened risk to investors or the integrity of U.S. capital markets.”
OCIE also plans to pay particular attention to certain areas in fulfilling its examination priorities. For example, to satisfy its goal of protecting retail investors, OCIE plans to focus on whether firms are adequately disclosing fees and expenses, as well as conflicts of interest. It also plans to place particular focus on services and investments targeted at senior investors and those saving for retirement, portfolio management processes, mutual funds and exchange traded funds, municipal advisors, broker-dealers who hold customer assets, and microcap securities. OCIE also plans to continue its practice of performing risk-based examinations of investment advisers who have never been examined before.
For firms that play a pivotal role in market infrastructure, OCIE plans to pay particular attention to examining clearing agencies, entities that are regulated under Regulation Systems Compliance and Integrity, or Regulation SCI, transfer agents, and national securities exchanges. OCIE also plans to conduct examinations of FINRA’s operations, regulatory programs, and the status of FINRA’s examinations of broker-dealers. OCIE also plans to examine the MSRB to ensure that its policies and procedures regarding municipal securities are effective.
In light of the changes that technological development has brought to investing over the years, OCIE plans to prioritize examinations of digital assets and firms’ cybersecurity policies. For digital assets, OCIE plans to evaluate firms who specialize in digital assets, concentrating on items such as the firms’ portfolio management of digital assets, safeguarding of client funds, and internal controls. For cybersecurity, examinations will concentrate on issues such as configuration of network storage devices and firms’ policies and procedures pertaining to retail trading information security.
Finally, OCIE intends to evaluate firms’ anti-money laundering policies. OCIE notes that, under the Bank Secrecy Act, anti-money laundering policies must feature policies and procedures reasonably tailored to confirm customer identities, carry out customer due diligence, and examine clients for suspicious activity.
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 compliance with federal and state laws and rules. Please visit our website for more information.