On January 11, 2016, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its examination priorities for 2016, which are organized around the same thematic areas as the 2015 examination priorities: (1) retail investors, particularly those saving for retirement; (2) assessing issues related to market-wide risks; and (3) the use of data analytics to identify and examine registrants that may be engaged in illegal activity. OCIE has identified several new areas of focus related to these priorities, which reflect a continuing focus on cybersecurity, microcap fraud, fee selection, and reverse churning. SEC Chair Mary Jo White noted that the new areas of focus, which include liquidity controls, public pension advisers, product promotions, exchange-traded funds, and variable annuities, are extremely important to investors and financial institutions.
Protecting Retail Investors and Investors Saving for Retirement
Retail investors’ growing dependence on their own money for retirement and the complex and evolving set of choices on how to invest their money has led OCIE to again list retail investors as an examination priority. OCIE is specifically focusing on the following areas, among others, to assess risks to retail investors saving for retirement:
- Exchange-Traded Funds ("ETFs")– Examiners will review ETFs to ensure they are in compliance with applicable exemptive relief granted under the Securities Exchange Act of 1934 and Investment Company Act of 1940.
- Fee Selection and Reverse Churning– Examiners will test whether or not advisers and broker-dealers are selecting the types of account and fee structures that are in their clients’ best interests.
- Variable Annuities– Examiners will test whether or not advisers and broker-dealers are recommending variable annuities that are in the best interests of their clients.
- Public Pension Advisers– Examiners will focus on compliance with the “Pay-to-Play” rule.
Assessing Market-Wide Risks
OCIE has identified the following structural risks and trends in the market on which it will focus or continue to focus in 2016, among others:
- Cybersecurity– Continuing the initiative launched in 2014, exam staff will test and assess firms’ implementation of procedures and controls.
- Liquidity Controls– OCIE staff will examine advisers to mutual funds, ETFs, and private funds that have exposure to potentially illiquid fixed income securities.
Using Data Analytics to Identify Signals of Potential Illegal Activity
The SEC staff uses data and intelligence gathered from their examinations and regulatory filings to identify registrants that appear to have elevated risk profiles. In 2016, OCIE will focus its data analysis efforts on the following risk areas, among others:
- Recidivist Representatives and their Employers– Examiners will continue to identify individuals who have a history of misconduct and examine the firms for which they are employed.
- Excessive Trading– Exam staff will seek to identify and examine firms that appear to be engaging in excessive trading or otherwise potentially inappropriate trading of client accounts by analyzing data obtained from clearing brokers.
- Product Promotion– Examiners will look for the promotion of new, complex, and high-risk products to identify potential suitability issues and potential breaches of fiduciary obligations.
In addition to the focus areas discussed above, OCIE will:
- Continue to examine newly registered municipal advisers to assess their compliance with new Municipal Securities Rulemaking Board rules and perform industry outreach and education;
- Evaluate whether private placement issuers are meeting their legal obligations with respect to due diligence, disclosure, and investment suitability;
- Continue to conduct focused and risk-based examinations of “Never-Before-Examined” investment advisers and investment company complexes; and
- Review fees and expenses allocated to private funds and evaluate the controls and disclosures related to side-by-side management of performance-based and asset-based fee accounts.
While the staff has indicated that this list is not exhaustive, it does provide a clear picture of the areas on which OCIE will concentrate their examination efforts. ACA recommends that you review your compliance practices in these areas in order to ensure you are prepared in the event of an SEC examination.
If you have any questions or concerns please contact your ACA consultant or Lynne Carreiro at +44 (0)20 7042 0500.