SEC OCIE Releases 2019 Examination Priorities
January 11, 2019
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2019 Examination Priorities.
In 2018, OCIE’s approximately 1,000 staff in 11 regional offices and headquarters completed 3,150 examinations of SEC-registered investment advisers, investment companies, and broker-dealers. Examinations of investment advisers increased slightly from 15% in the prior year to 17% in 2018, while examinations of investment companies increased by approximately 45%. OCIE examinations led to more than 160 enforcement referrals and resulted in firms returning more than $35 million to investors.
OCIE’s 2019 examination priorities, which are nearly identical to last year’s priorities, are organized around the following six themes:
1. Retail Investors, including Seniors and Those Saving for Retirement
OCIE will continue to prioritize protecting retail investors, particularly seniors and those saving for retirement, and pursue examinations of firms that provide products and services directly to them. OCIE’s focus areas in this category are:
- Disclosure and calculation of fees and expenses. Specifically, OCIE will select firms with practices or business models that may create increased risk of inadequately disclosed fees, expenses or other charges; evaluate financial incentives for financial professionals that may influence their selection of particular mutual fund share classes; and focus on investment advisers participating in wrap fee programs;
- Conflicts of interest, including the use of affiliated service providers and products; the recommendation of securities-backed non-purpose loans and lines of credit to clients; and the practice of borrowing funds from clients;
- Portfolio management and trading. OCIE will review the allocation of investment opportunities among clients and consistency of investments with client investment objectives. OCIE will also examine whether investment advisers’ investment or trading strategies are (i) suitable for and in the best interests of investors based on client investment objectives and risk tolerances; (ii) contrary to or have drifted from client disclosures; (iii) entering into new or risky investments without adequate risk disclosure and (iv) appropriately monitored for associated risks;
- Never-before or not recently-examined investment advisers;
- Mutual funds and exchange traded funds;
- Municipal advisors;
- Broker-dealers entrusted with customer assets; and
- Broker-dealers involved in selling microcap securities.
2. Compliance and Risks in Critical Market Infrastructure
OCIE will continue its examination of certain entities that offer services critical to the proper functioning of capital markets, including clearing agencies, national securities exchanges, and transfer agents.
3. FINRA and MSRB
OCIE will continue to examine the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”), with a focus on the quality of FINRA’s examinations of broker-dealers and municipal advisors and the effectiveness of MSRB’s policies, procedures, and controls.
4. Digital Assets
OCIE will continue to monitor the offer and sale, trading, and management of digital assets, which include cryptocurrencies, coins, and tokens. OCIE will examine firms actively engaged in the digital assets market to assess their portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.
OCIE will continue to prioritize cybersecurity in its examination programs, focusing on, among other topics, configuration of network storage devices, information security, governance and risk assessment, and policies and procedures related to retail trading information security. OCIE will emphasize cybersecurity practices at investment advisers with multiple branch offices, including those that have recently merged with other investment advisers, and focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
6. Anti-Money Laundering Programs
OCIE will continue to examine broker-dealers for compliance with their anti-money laundering (“AML”) obligations, including requirements to establish policies and procedures reasonably designed to identify customers, perform customer due diligence, monitor for suspicious activity and conduct independent tests of their AML program.
OCIE noted that its list of examination priorities is not exhaustive. While OCIE expects to allocate significant resources to these examination issues, OCIE will also conduct examinations focused on risks, issues, and policy matters that arise from market and regulatory developments, new information learned from examinations, or other sources, including tips, complaints, and referrals, and coordination with other regulators.
In view of the growing frequency and scope of OCIE exams, investment advisers should regularly review the adequacy and effectiveness of their compliance program, policies and procedures.
Seward & Kissel Regulatory Compliance (“SKRC”) offers mock audits, compliance reviews and trainings to help investment advisers prepare for OCIE exams.