The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released its 2019 Examination Priorities on December 20, 2018. While most of the topics are familiar, there are a few new items of note. OCIE has divided its priorities into four categories:
Retail Investors, Including Seniors and Those Saving for Retirement
OCIE will continue to focus on disclosure and calculation of fees; the supervision of those selling products and services to investors, broker-dealers entrusted with customer assets, and portfolio management and trading.
- “Disclosures of the Costs of Investing.”OCIE will select firms with business models or practices that may create increased risk of inadequately disclosed fees, expenses or other charges, including wrap fee programs. OCIE will also continue to evaluate financial incentives for financial professionals that may influence their selection of asset classes.
- Conflicts of Interest. Examinations will review policies and procedures around the use of affiliated service providers and products, securities-backed non-purpose loans and lines of credit, and borrowing funds from clients.
- Retirement Accounts & Products. Exams will review how broker-dealers oversee their transactions with senior investors, including identification of financial exploitation. OCIE will review the investment adviser compliance programs regarding the appropriateness of investment recommendations to seniors and firm supervision of employees and independent reps.
- Portfolio Management & Trading. OCIE will examine firms’ practices for executing transactions on behalf of clients, allocation of investment opportunities, consistency of investment meeting client objectives, information disclosure and compliance with legal restrictions.
- “Never-Before-Examined Investment Advisers.” OCIE will prioritize examinations of certain investment advisers that have not been examined for a number of years and may have substantially grown or changed business models.
- “Mutual Funds and Exchange Traded Funds (ETFs).” OCIE will focus on risks associated with:
- Index funds that track custom-built or bespoke indexes
- ETFs with little secondary market trading volume and smaller assets under management
- Funds with higher allocations to certain securitized assets
- Funds with aberrational underperformance relative to their peer groups
- Funds managed by advisers that are relatively new to managing Registered Investment Companies (RICs)
- Advisers that provide advice to both RICs and private funds with similar investment strategies.
- Municipal Advisers. For Municipal Advisers that have never before been examined, OCIE will check registration, qualification and education requirements are being met. OCIE will also prioritize whether MAs provided appropriate conflicts of interest disclosures and their compliance with recently-effective MSRB rules.
- Broker-Dealers Entrusted with Customer Assets. Examinations will focus on compliance with the Customer Protection Rule (Exchange Act Rule 15c3-3).
- Microcap Securities. OCIE will examine broker-dealers involved in selling stocks of companies with a market cap of $250 million. Areas of examination will include manipulative schemes, compliance with Reg SHO and Exchange Act Rule 15c2-11.
Compliance and risks in critical market infrastructure
OCIE will conduct examinations of Clearing Agencies, National Securities Exchanges, Transfer Agents and Regulation Systems Compliance and Integrity (“Reg SCI”) Entities to ensure compliance and reduce systematic risks in the marketplace. Of note, OCIE indicated it will conduct examinations of transfer agents that serve as paying agents for issuers, transfer agents developing blockchain technology, or transfer agents providing services to issuers of microcap securities, private offerings crowdfunded securities or digital assets.
Focus on FINRA and MSRB
OCIE examinations of FINRA will focus on operations and regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors registered as broker-dealers. OCIE will also continue to evaluate the effectiveness of MSRB operational and internal policies, procedures, and controls.
Digital Assets, Cybersecurity and Anti-Money Laundering
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. Malefactors will always be vigilant for opportunities. OCIE examinations will “prioritize cybersecurity with an emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security.”
OCIE examinations of firm AML programs will review whether broker-dealers are meeting their SAR filing obligations, implementing all elements of their AML program, and robustly conducting independent tests of their AML program.
