On December 20, 2018, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its examination priorities for 2019. The priorities continue to focus on protecting retail investors and assessing market-wide risks.
2019 Priorities at a Glance
OCIE organized the 2019 examination priorities around the following themes:
- Retail investors, including seniors and people saving for retirement;
- Compliance and risks in critical market infrastructure;
- The Financial Industry Regulatory Authority (“FINRA”) and Municipal Securities Rulemaking Board (“MSRB”);
- Digital assets, which include cryptocurrencies, coins, and tokens;
- Cybersecurity; and
- Anti-money laundering programs.
These focus areas are similar to OCIE’s priorities for 2018. Retail investors, especially retirement plans and senior investors, remain on the examination priorities list perennially. The increasing complexity of fraud, as well as the generally unsophisticated nature of the great majority of the retail market, creates a situation ripe for abuse. Perhaps the most interesting focus area is that of portfolio management and trading within the context of retail investors. The SEC staff ("the Staff") indicated that “reviewing portfolio management processes is an integral component to investment adviser examinations. OCIE will review firms’ practices for executing investment transactions on behalf of clients, fairly allocating investment opportunities among clients, ensuring consistency of investments with the objectives obtained from clients, disclosing critical information to clients, and complying with other legal restrictions."
The Staff also continues to highlight cybersecurity and anti-money laundering reviews. Firms should be assessing their procedures to ensure that they are in compliance with industry best practices.
2019 Priorities in Detail
Protecting Retail Investors, Including Seniors and Those Saving for Retirement
OCIE will pursue a variety of examination initiatives to assess potential risks to retail investors that arise in an increasingly complex investment landscape. Among other things, the SEC's National Exam Program ("NEP") will focus on the following:
- Disclosure of the Costs of Investing
Examiners will continue to review whether fees and expenses are calculated and charged in accordance with disclosures provided to investors.
- Conflicts of Interest
Examiners will review policies and procedures that address potential conflicts of interest such as the use of affiliated service providers and products, securities-backed non-purpose loans and lines of credit, and borrowing funds from clients.
- Senior Investors and Retirement Accounts and Products
OCIE will continue to review how broker-dealers oversee their interactions with senior investors and how services and products are offered to seniors.
- Portfolio Management and Trading
OCIE will review firms’ practices for fairly executing investment transactions on behalf of clients and examine investment adviser portfolio recommendations to assess, among other things, whether investment or trading strategies of advisers are suitable for and in the best interests of investors.
- Never-Before Examined Investment Advisers
OCIE will continue to conduct examinations of newly registered advisers, as well as advisers that have been registered for some time but have never been examined.
- Mutual Funds and Exchange Traded Funds (ETFs)
Examiners will continue to focus on mutual funds and ETFs and whether advisers are properly disclosing investment risks to investors and the oversight practices of their board of directors. The SEC staff will also focus on mutual funds managed by advisers that have little experience managing registered investment companies.
- Municipal Advisors and Underwriters
OCIE will continue to examine municipal advisors’ compliance with registration, continuing education, recordkeeping, and supervision requirements, with a focus on municipal advisors that are not registered broker-dealers. Examinations will also review for compliance with recently-effective MSRB rules.
- Broker-Dealers Entrusted with Customer Assets
Examinations of select broker-dealers will focus on compliance with the Customer Protection Rule (Exchange Act Rule 15c3-3), as well as procedures and controls to promote compliance.
- Microcap Securities
OCIE will continue to examine broker-dealers involved in selling stocks of companies with a market capitalization of under $250 million and review for manipulative schemes, compliance with Regulation SHO, and compliance with Exchange Act Rule 15c2-11.
Compliance and Risks in Critical Market Infrastructure
OCIE will continue to examine firms that provide services that directly impact the functioning of critical markets with a focus on those firms’ operations and compliance with recently effective rules.
- Clearing Agencies
OCIE will continue to conduct examinations of clearing agencies that the Financial Stability Oversight Council has deemed systemically important and risk-based examinations of other registered clearing agencies.
- Regulation Systems Compliance and Integrity (SCI) Entities
Examiners will continue to review SCI entities and assess the effectiveness of their written policies and procedures as relates to Regulation SCI.
- Transfer Agents
Examiners will focus on transfer agent operations, including transfers, recordkeeping, and the safeguarding of funds and securities.
- National Securities Exchanges
OCIE will examine internal audit and surveillance programs and funding for regulatory programs.
FINRA and MSRB
OCIE will continue to oversee FINRA and MSRB.
OCIE examinations of FINRA will focus on FINRA’s operations and regulatory programs, including the quality of their examinations of broker-dealers and municipal advisors that are also registered as broker-dealers.
OCIE examinations of MSRB will focus on the effectiveness of MSRB’s operational and internal policies, procedures, and controls.
There has been significant growth in this market which means increased risk. In addition to continuing to monitor the offer and sale, trading, and management of digital assets, for firms actively engaged in the digital asset market, examinations will focus on, among other things, portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.
The NEP will continue to prioritize cybersecurity across the firms it oversees. Focus areas will include proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security, among others.
Anti-Money Laundering Programs
Examiners will continue to review whether firms are in compliance with applicable anti-money laundering requirements, with a focus on the compliance and testing of these firms’ AML programs.
Want to Learn More?
We recently hosted the webcast The Compliance Year in Review, which took a look back on developments from 2018 and discuss what to expect in 2019.
For More Information
For more information, please contact Damon Zappacosta or your ACA consultant.