Each year, the SEC’s Office of Compliance Inspections and Examinations (OCIE) publishes its priorities, and 2017 is no exception. On January 12, 2017, OCIE announced its examination priorities. Registered Investment Advisers (RIAs) and other financial entities will benefit by knowing which areas examiners are focused on, because OCIE views them as a potential threat to investors. State-registered investment advisers should also take note of these priorities, since state securities regulators are likely to focus on these same areas.
OCIE wants to safeguard retail investors
As always, the protection of retail investors is an examination priority. OCIE listed a number of areas where retail investors may be harmed.
Electronic Investment Advice. Automated or digital platforms, commonly known as robo-advisers, utilize automation as a component of their services. Examiners will focus on registrants’ compliance programs, marketing, formulation of investment recommendations, data protection, and conflicts of interest disclosures. OCIE will also review firms’ oversight of the algorithms that generate recommendations.
Wrap Fee Programs. Examiners will look at wrap account suitability, disclosures, conflicts of interest, and brokerage practices, such as best execution and trading away.
Exchange-Traded Funds (ETFs). OCIE is particularly concerned about the suitability of broker-dealer recommendations of ETFs with niche strategies, as well as ETF sales practices and disclosures.
Never-Before Examined Investment Advisers. Once again, OCIE is acting upon its Never-Before Examined Adviser initiative, which was launched on February 20, 2014.
Recidivist Representatives and their Employers. Using data analytics, OCIE will identify individuals with a track record of misconduct and will evaluate the compliance oversight of RIAs that employ them.
Multi-Branch Advisers. OCIE will focus on firms utilizing a branch office model and will assess their oversight of advisory services provided at remote locations. OCIE’s Multi-Branch Adviser Initiative was launched on December 12, 2016.
Share Class Selection. OCIE will continue to identify and evaluate the conflicts that arise when members of an RIA are also registered representatives of a broker-dealer and recommend share classes with higher loads or distribution fees. OCIE launched its share class initiative on July 13, 2016.
Protection of senior investors and retirement investments is a priority
Protecting senior investors has always been a high priority for securities regulators. Because fewer investors have pensions, they must rely on their own investments to fund their retirement. Examiners will look at firms’ supervisory programs and controls relating to products and services aimed at senior investors.
OCIE will continue its Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative, which was launched on June 22, 2015. The scope of the ReTIRE initiative has been broadened and it will include a review of variable insurance products and target date funds. Examiners will also review controls related to cross transactions.
In addition, OCIE is focused on public pension advisers to ensure they are managing conflicts of interest and satisfying their fiduciary obligations. As part of their reviews, examiners will be on the lookout for pay-to-play transgressions and undisclosed gifts or entertainment.
Protecting investors from market-wide risks remains a priority
OCIE continues to be focused on structural risks and trends involving multiple firms and entire industries. Examiners will be scrutinizing firms’ cybersecurity compliance procedures and controls. They will also make certain RIAs have tested the implementation of those procedures and controls.
The risk of money laundering and terrorist financing will also be addressed during examinations. In particular, examiners will be evaluating broker-dealers’ anti-money laundering programs to ensure they are thorough and effective. Examiners will review how broker-dealers monitor suspicious activity and their compliance with suspicious activity reporting requirements.
OCIE will enhance its oversight of FINRA. It will inspect FINRA’s operations and regulatory programs. Furthermore, OCIE will assess the quality of FINRA’s examinations of broker-dealers.
Among other initiatives, OCIE will focus on private fund advisers, municipal advisors, and transfer agents.
Awareness of OCIE’s priorities can help RIAs to ensure that their compliance programs are focused on many of the risks that threaten clients. Nevertheless, examiners will be reviewing all elements of an RIA’s compliance program, not just OCIE’s compliance priorities. OCIE’s priorities are not exhaustive and may change, if necessary, because of market conditions, industry developments, and newly identified risks.
OCIE’s 2017 priorities can be found at the following Link.