Friday, February 09, 2018

Investor concerns, compliance risks top OCIE 2018 exam priorities

By Amy Leisinger, J.D.

The SEC’s Office of Compliance Inspections and Examinations has announced its 2018 examination priorities in its continuing effort to encourage compliance, prevent fraud, and identify and monitor potential risks. This year’s priorities focus on five main areas: (1) compliance of and risks associated with service providers; (2) issues directly affecting retail investors; (3) the activities and operations of the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board; (4) cybersecurity; and (5) anti-money laundering programs.

As markets and products and services evolve, OCIE remains committed to those aspects of the industry posing the greatest potential risks to investors and/or to market integrity, said OCIE Director Pete Driscoll.

Retail investors. For retail investors, OCIE examinations will focus on disclosures concerning the costs of investing and potential conflicts of interest, calculation of fees and expenses, and supervision of sales representatives. The staff will continue to examine investment advisers and broker-dealers that offer investment advice through automated or digital platforms or that are associated with wrap fee programs that charge investors a single, bundled fee based on percentage of assets. OCIE will also review how broker-dealers oversee interactions with senior investors and maintain internal controls designed to supervise representatives and examine mutual funds and ETFs that have experienced poor performance, are managed by less-experienced advisers, or hold securities difficult to value in times of market stress. As cryptocurrencies continue to evolve, examiners will review risk disclosures made by registrants involved in offers and sales and whether financial professionals maintain adequate safeguards to protect these assets from misappropriation. Examinations will specifically target circumstances in which retail investors may have been harmed, OCIE explains.

Compliance and risks in market infrastructure. OCIE will continue to examine the operations and compliance of entities that provide services critical to the proper market functioning, including clearing agencies, national securities exchanges, and transfer agents. The staff will annually examine clearing agencies that the Financial Stability Oversight Council has designated as systemically important, focusing on compliance with the SEC’s standards for covered clearing agencies and corrective actions taken in response to prior examinations. OCIE will also review internal audits conducted by exchanges, the payment of fees, and the operation of certain NMS plans and examinations of transfer agents will focus on transfers, recordkeeping, and the safeguarding of assets. The staff will also evaluate SCI entities to ensure that they have effectively implemented written policies and procedures and controls and assess entities’ business continuity plans and risk management activities.

Other priorities. OCIE will continue to examine the effectiveness and operations of both FINRA and the MSRB, as well as the quality of FINRA’s broker-dealer examinations. Examiners will also work with firms to identify and manage cybersecurity risks and examinations will focus on governance and risk assessment, access controls, data loss prevention, and training, among other things. The staff will also will examine whether entities are complying with applicable anti-money laundering requirements and adapting their programs to properly address risks.

OCIE notes that the published 2018 priorities are not exhaustive and that it 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.

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