By Lance WhittemoreSubscribe to our original industry insights
SEC Posts 2018 Exam Priorities
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released its 2018 National Exam Program examination priorities yesterday. 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
- “Disclosures of the Costs of Investing.” Formerly “fees and expenses”, the title change indicates a more retail-focused look.
- “Electronic Investment Advice.” Robo-advisors and other automated platforms that offer investment advice continue to be on the regulatory radar. OCIE exams will focus on compliance programs, recommendation algorithms, marketing materials, data protection and disclosure of conflicts of interest.
- “Wrap Fee Programs.” Wrap sponsors or participants will need to make sure they are fulfilling their fiduciary standard, that their disclosures are fair and complete, and that their advisors are obtaining best execution and disclosing the costs associated with executing trades through another broker-dealer.
- “Never-Before-Examined Investment Advisers.” The increasing number of newly registered advisors continues to draw the risk-focused attention of the OCIE.
- “Senior Investors and Retirement Accounts and Products” Calling out this category of investor reflects the industry’s increased focus on protecting vulnerable clients. Firms should review their policies and procedures for product recommendation, recognition and handling of possible exploitation.
- “Mutual Funds and Exchange Traded Funds (ETFs).” OCIE will focus on controls, liquidity, performance and disclosure of investment risks to investors.
- “Municipal Advisors and Underwriters.” In recent years, OCIE has conducted the MCDC Initiative and a Municipal Advisor sweep. In this year’s priorities, OCIE states it “will continue to examine municipal advisors to evaluate their compliance with registration, recordkeeping, and supervision requirements, particularly those municipal advisors that are not registered as broker-dealers.” It appears that similar endeavors may be the horizon.
- “Fixed Income Order Execution.” OCIE will conduct examinations to assess whether broker-dealers have implemented best execution policies and procedures for both municipal bond and corporate bond transactions.
- “Cryptocurrency, Initial Coin Offerings (ICOs), Secondary Market Trading, and Blockchain.” The number of broker-dealers and advisors engaged in this space is growing, as are the risks to investors. OCIE will examine to ensure controls are in place to protect these assets from theft or misappropriation, disclosure of risks associated with these investments including losses, liquidity risks, price volatility and potential fraud.
Compliance and risks in critical market infrastructure
Generally, in this category, 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.
Focus on FINRA and MSRB
Self-Regulatory Organizations (“SROs”) are subordinate to the SEC, and the SEC is charged with oversight of the marketplace. 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.
Cybersecurity and anti-money laundering
Malefactors will always be vigilant for opportunities. OCIE examinations “have and will continue to focus on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.“
OCIE examinations of firm ALM programs will compare written policies and procedures against actual practices and books and records, and determine if independent testing and correct, complete and accurate filing requirements are being met.
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