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On January 12, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) announced its examination priorities for 2017. The priorities continue to focus on protecting retail investors and assessing market-wide risks. Similar to 2016, OCIE organized the 2017 examination priorities around the following themes: (1) examining matters of importance to retail investors, (2) focusing on risks specific to elderly and retiring investors, and (3) assessing market-wide risks. The outgoing SEC Chair Mary Jo White said that the SEC continues to focus on a wide range of issues impacting the markets, from traditional areas to new forms of technology, including automated investment advice. Indeed, electronic investment advice, including the use of “robo-advisers,” is making its debut on OCIE’s annual priorities list. OCIE has also identified the following areas of focus for investment advisers: wrap fee programs, exchange-traded funds (“ETFs”), never-before examined investment advisers, recidivist representatives and their employers, multi-branch advisers, retirement investments, cybersecurity, municipal advisors, and private fund advisers. OCIE has incorporated data analytics into a majority of these examination initiatives to identify industry practices and/or entities that appear to have elevated risk profiles.
Protecting Retail Investors
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 examination program will focus on the following:
Electronic Investment Advice
The SEC will examine robo-advisers or registered investment advisers and broker-dealers that primarily interact with clients online, as well as those firms that offer a combination of automated investment and traditional advisory services. Examiners will focus their review on those firms’ compliance programs, marketing, data protection, disclosures relating to conflicts of interest, and the formulation of investment recommendations, including compliance oversight over algorithms that generate recommendations.
Wrap Fee Programs
Examiners will continue to review whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients. Focus areas will include account suitability, disclosures, conflicts of interest, and trading practices.
Never-Before Examined Investment Advisers
OCIE plans to conduct examinations of newly-registered advisers as well as advisers that have been registered for some time but have never been examined.
Recidivist Representatives and their Employers
Examiners will continue to identify individuals who have a history of misconduct and examine the firms that employ them.
Examiners will continue to review the compliance program and oversight process of firms that offer advisory services from multiple locations or branch offices.
Risks Specific to Elderly and Retiring Investors
OCIE will continue to focus its attention on issues that impact retirement investments.
Examiners will focus on firms’ recommendations and sales of variable insurance products, as well as sales and management of target date funds. Examiners will also assess controls surrounding cross-transactions involving fixed income securities.
Public Pension Advisers
Examiners will continue to review investment advisers’ compliance with the “Pay-to-Play” rule, and will assess how advisers are managing conflicts of interest and fulfilling their fiduciary duty. They will also focus on investment advisers’ gifts and entertainment activities.
Assessing Market-wide Risks
OCIE will continue the initiative launched in 2014, which focuses on firms’ cybersecurity compliance procedures and controls. This year, examiners will test the firms’ implementation of those procedures and controls.
Other Adviser Initiatives
In addition to the above priorities, OCIE expects to continue conducting examinations of municipal advisors and private fund advisers. The SEC’s examination program will evaluate municipal advisors’ compliance with SEC and Municipal Securities Rulemaking Board rules, and focus on private funds’ identification and disclosure of conflicts of interest. In addition, examiners will assess any actions that benefit private fund advisers at their investors’ expense.
Broker-dealer Exam Priorities
The SEC’s broker-dealer examination staff will focus on the following areas:
Senior Investors and Retirement Accounts
OCIE is broadening its ReTIRE initiative to include reviews of broker-dealers that offer variable insurance products to investors with retirement accounts.
OCIE will continue to conduct inspections of FINRA's operations and regulatory programs, and focus resources on assessing the examinations of individual broker-dealers.
OCIE will continue to examine cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers.
Please contact Damon Zappacosta or your regular ACA consultant for more information.