On January 12th, the Security and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) announced its examination priorities for 2017. The list — which isn’t exhaustive and may be modified to reflect future developments — is organized around three themes: protecting retail investors, focusing on senior investors and retirement investments, and assessing market-wide risks.
The priorities address issues that involve a variety of financial institutions and professionals, including investment advisors, investment companies, broker-dealers, clearing agencies, and national securities exchanges. In addition, the OCIE will allocate resources to the examination of municipal advisors, transfer agents, and private fund advisors.
OCIE initiatives that assess potential risks to retail investors include:
- Electronic investment advice. The OCIE will scrutinize “robo advisors” and other firms that interact with clients primarily online, as well as firms that use automation as a component of their services but also offer access to financial professionals. Examinations will likely focus on firms’ compliance programs, marketing, investment recommendation formulation, data protection, and conflict-of-interest disclosures.
- Wrap fee programs. The OCIE will expand its focus on programs that charge investors a bundled fee for advisory and brokerage services. It plans to review whether firms are satisfying their fiduciary duties and contractual obligations to clients, as well as wrap account suitability, disclosure effectiveness, conflicts of interest, and brokerage practices.
- Never-before-examined investment advisors. This initiative will be expanded to include focused, risk-based examinations of newly registered advisors and selected longer-term advisors that have never been examined.
Other examination areas include Exchange-Traded Funds, recidivist representatives (those with a track record of misconduct) and their employers, multi-branch advisors, and share class selection.
Senior Investors and Retirement Investments
The OCIE plans to continue its ReTIRE initiative, which focuses on services offered to investors with retirement accounts. The examination focus this year will include recommendations and sales of variable insurance products and sales and management of target date funds. Also in the OCIE’s crosshairs are advisors to public pensions, particularly how they manage conflicts of interest and fulfill fiduciary duties. Key risk areas include pay-to-play and undisclosed gifts and entertainment.
Another area of concern is firms’ management of interactions with senior investors, including their ability to identify financial exploitation. Examinations will focus on firms’ supervisory programs and controls surrounding products and services directed toward senior investors.
Broader market-related initiatives include:
- Money market fund compliance with the SEC’s amended rules (which took effect in October 2016);
- Continued evaluation of firms’ cybersecurity compliance procedures and controls, including implementation testing;
- Continued examination of broker-dealers’ anti-money laundering programs, focusing on the adequacy of independent testing; and
- Enhanced oversight of the Financial Industry Regulatory Authority, focusing on the quality of its examinations of individual broker-dealers.
Other priorities include examination of payment for order flow, evaluation of regulation systems compliance and integrity, and risk-based inspections of national securities exchanges.
Consider reviewing your compliance policies and procedures now in light of the SEC’s examination priorities and then make any necessary adjustments. This proactive approach will help protect your firm in the event of an SEC examination or enforcement action.
If you have questions on the new priorities, please contact your Untracht Early advisor.