The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently released its 2016 Examination Priorities. The new priorities cover several areas of interest to firm managers, including liquidity control, cybersecurity, and fee evaluation.
Public pension and private fund advisors will also receive closer scrutiny in the coming year, as will investment advisors who haven’t yet come under the OCIE’s examination.
OCIE Priority 1: Protecting Investors
Protecting retail investors remains a priority for the OCIE in 2016.
The group will continue its examination of SEC-registered investment advisers and broker-dealers, and their handling of investors’ retirement accounts. Their recommendations, supervision and compliance controls, and marketing and disclosure practices will be scrutinized for potential conflicts of interest.
The branch offices of SEC-registered investment advisers and broker-dealers will also go under the microscope this year. The OCIE plans to use data analytics to identify registered representatives who are potentially engaged in inappropriate trading. Investment adviser/broker-dealers that offer retail investors a variety of fee arrangements will also get a closer look to ensure their rates, recommendations and disclosures are in the best interest of the investor.
Finally, public pension advisors will be reviewed to ensure they did not receive any undisclosed gifts or entertainment, and the sales and disclosure strategies of EFTs and variable annuities will also be examined.
OCIE Priority 2: Reduce Cybersecurity & Other Market-Wide Risks
At the market level, cybersecurity will remain a strong focus for the OCIE, particularly firms’ compliance with and implementation of cybersecurity prevention methods.
The OCIE will also examine and review the market risk management of advisers to mutual funds, ETFs, and private funds that have exposure to potentially illiquid fixed income securities.
OCIE Priority 3: Use Analytics To Detect Illegal Activity
In the coming year, the OCIE will rely heavily on data gathered during its examinations and from regulatory filings to identify registrants they believe have elevated risk profiles.
Those with a track record of past misconduct, and the firms that currently employ them, will be scrutinized, as will broker-dealers and transfer agents whose actions indicate they may be involved in pump-and-dump schemes or market manipulation.
Data obtained from clearing brokers will also be analyzed to find firms that appear to be engaged in excessive or otherwise potentially inappropriate trading.
In an effort to prevent the funding of terrorist accounts, the OCIE will continue to investigate firms’ Anti-Money Laundering (“AML”) programs. Firms that have not filed the number of suspicious activity reports (“SARs”) that would be consistent with their business models will receive extra attention. As will those who have filed incomplete or late SARs.
The OCIE also announced that newly-registered municipal advisors and investment companies that have not yet been examined will receive closer attention in the coming months, as will the fee structures charged by private fund advisers.
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