By Jacquelyn Lumb
The SEC’s Office of Compliance Inspections and Examinations this year will focus on areas of importance to retail investors, risks affecting elderly and retiring investors, and the assessment of market-wide risks. OCIE believes these areas carry the greatest potential risk to investors or to the integrity of the financial markets. Each year, OCIE publishes its examination priorities so that registrants can consider whether their compliance programs are in need of improvement. The priorities are selected in consultation with other SEC offices and divisions.
Retail investors. In connection with its focus on retail investors, OCIE will examine the use of electronic investment advice, wrap fee programs, exchange-traded funds (ETFs), never before examined investment advisers, recidivist representatives and their employees, multi-branch advisers, and share class selections.
During its examination of the use of investment advice via automated or digital platforms, the staff will consider registrants’ compliance programs, marketing, formulation of recommendations, data protection, and disclosures about conflicts of interest. The staff will also review registrants’ compliance practices for overseeing algorithms that generate investment recommendations.
The examination of wrap fee programs, in which investment advisers or broker-dealers charge a single bundled fee for advisory and brokerage services, will include whether investment advisers are acting in a manner that is consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients.
The staff will review ETFs for compliance with any exemptive relief they have been granted, along with their unit creation and redemption processes. Another area of focus for ETFs will be on their sales practices and disclosures regarding the suitability of broker-dealers’ recommendations to purchase ETFs with niche strategies.
The staff will use data analytics to identify individuals with past records of misconduct and will examine the investment advisers with which they are employed.
Multi-branch advisers—those that provide advisory services from multiple locations—can pose unique risks, according to OCIE, which is why the staff will review the design and implementation of their compliance programs and their oversight of the services provided at the branch offices.
The staff will look for possible conflicts in connection with recommendations that investors acquire or remain invested in certain mutual fund share classes, such as classes with higher loads or distribution fees. It will also assess the formulation of investment recommendations and the management of client portfolios.
Senior investors. OCIE will continue its ReTIRE initiative which focuses on retirement account services. The examinations will include reviews of the recommendations and sales of variable insurance products and target date funds, and will include assessments of the controls over cross-transactions, with a particular focus on fixed income securities.
The staff will examine public pension advisers to assess how they are managing conflicts of interest and how they are fulfilling their fiduciary duties, in addition to looking at risks specific to these advisers such as pay-to-play and undisclosed gifts and entertainment.
The staff will also evaluate firms’ interactions with senior investors and whether they are able to identify any exploitation of seniors.
Market-wide risks. The market-wide risks on which OCIE will focus include those associated with money market funds, payment for order flow, clearing agencies, FINRA, Regulation Systems Compliance and Integrity (SCI), cybersecurity, national securities exchanges, and anti-money laundering programs.
The money market fund reviews will assess compliance with rules adopted in 2014. The payment for order flow reviews will assess how broker-dealers are complying with their duty of best execution. The review of clearing agencies will be determined through a risk-based approach in collaboration with the Division of Trading and Markets. OCIE plans to enhance its oversight of FINRA and will continue to examine whether SCI entities are complying with Regulation SCI.
In addition to the priorities outlined above, OCIE advised that it will also allocate some of its examination resources to municipal advisers, transfer agents and private fund advisers. OCIE also may conduct examinations relating to risks, issues, and policy matters that arise from market developments or new information that comes from tips, complaints and referrals.