By Amy Leisinger, J.D.
The SEC’s Office of Compliance Inspections and Examinations has published its annual examination priorities to enhance the transparency of its examination program and provide insight into potential risks to investors and market integrity. According to OCIE, examiners will focus heavily on issues directly affecting retail investor protection, entities providing critical services to capital markets, operations of SEC-regulated entities, and information security and fintech approaches. The office noted that many of these themes involve perennial risks and that examiners must remain vigilant in these significant areas.
"As markets evolve, so do risks and potential harm to investors. OCIE continually works to adjust its examination focus areas to target these risks and publishes its annual priorities to communicate where we see the potential for increased risk and related harm," said OCIE Director Pete Driscoll.
By the numbers. While explaining that numbers do not the complete story of effectiveness, OCIE’s report noted that the office completed 3,089 examinations in FY 2019. Examinations of registered investment advisers covered 15 percent of the population, and examinations of investment companies increased to over 15. OCIE also completed over 350 examinations of broker-dealers, 110 examinations of national securities exchanges, and over 90 examinations of municipal advisors and transfer agents. In addition, the report stated that OCIE verified over 3.1 million investor accounts involving assets totaling over $1.5 trillion.
2020 priorities. OCIE stated that, in 2020, it will continue to focus on the protection of retail investors, particularly regarding various intermediaries interacting with investors and the investment products marketed to them. Specifically, OCIE explained, examinations will include reviews of disclosures relating to fees, discounts, expenses, and conflicts of interest, as well as recommendations and advice given to retail investors. Examinations of registered investment advisers will focus on those that have never been examined, including advisers advising retail investors and private funds. Examiners will also continue to assess whether, as fiduciaries, investment advisers have fulfilled their duties of care and loyalty. After the compliance dates, OCIE also will assess the implementation of Regulation Best Interest requirements by both broker-dealers and investment advisers, as well as the content and delivery of Form CRS.
In addition, OCIE will focus on entities that provide services to the functioning of the capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. As part of its examinations, OCIE will consider registered clearing agencies’ governance, legal, compliance and risk management frameworks by reviewing efforts to escalate identified deficiencies and evaluate the operations of national securities exchanges and how they react to market disruptions. Transfer agents’ core functions also will be a key focus, including the timing of transfers, recordkeeping and record retention, and safeguarding of securities, the report noted.
OCIE also is focused on working with firms to identify and address information security risks, the report explained. Examinations will focus on, among other things, proper storage configuration, access controls, data loss prevention, vendor management and training, and incident response and resiliency. OCIE also will evaluate oversight of service providers and network solutions and any safeguards in place to ensure proper disposal of hardware that may contain vulnerable information. The report also recognized that advancements in financial technologies warrant ongoing attention and stated that OCIE will continue to examine registered entities engaged in the digital asset space, as well as advisers that provide services to clients through automated tools and platforms.
Finally, OCIE explained that it will continue to prioritize examinations for compliance with anti-money laundering obligations and assessments of whether firms have established appropriate customer identification programs, conducted due diligence, and complied with beneficial ownership requirements. The office will also continue its oversight of FINRA and the MSRB to evaluate the operational effectiveness and policies, procedures, and controls, the report concluded.