The Securities and Exchange Commission (SEC) announced the 2015
examination priorities of the Office of Compliance Inspections and
Examinations (OCIE) on January 13, 2015. OCIE's 2015 priorities
focus on broker-dealers, investment advisers, and transfer agents
and target three areas: (1) protecting retail investors and
investors saving for retirement; (2) assessing market-wide risks;
and (3) utilizing data analytics to identify and examine potential
illegal activity.
In announcing these priorities, OCIE proclaimed it is the
"eyes and ears of the SEC" and that it will allocate
significant resources to these examination issues in 2015. In
addition, OCIE said the priorities were derived with input from
senior officials across the agency (including from Enforcement and
the Regional Offices, as well as the Commissioners themselves). As
such, the OCIE staff assuredly will be looking during examinations
to uncover problems in these priority areas to refer to the
Enforcement Division. To protect themselves, financial firms should
closely review the priorities, perform a critical risk assessment
related to each priority, and promptly correct any identified
deficiencies in these areas.
Protecting Retail Investors and Investors Saving for Retirement
OCIE noted two trends motivating its initiatives to protect
retail investors and investors saving for retirement. First, retail
investors are being offered new products and services characterized
in the past as "institutional" or "alternative"
– for example, illiquid investments and structured products
intended to generate higher yields in a low-interest rate
environment. Second, the industry is offering investors saving for
retirement a wide variety of information and advice to aid in
planning for, as well as living in, retirement.
In reaction to these trends, OCIE announced examination
initiatives to, among other things:
- scrutinize fee selection and reverse churning;
- assess registrants' sales practices when recommending movement of retirement assets, particularly when they charge higher fees and present higher risks; and
- evaluate the suitability of registered entities' recommendations or determinations to invest retirement assets in complex or structured products and higher yield securities.
OCIE also expects to examine registered entities' supervision
of registered representatives and financial adviser representatives
in branch offices.
OCIE intends to continue to evaluate funds offering
"alternative" investments and utilizing alternative
strategies. In this context, OCIE will examine the adequacy of
internal controls; leverage, liquidity, and valuation policies and
practices; and the methods funds use to market to investors. In
response to the expected rise in interest rates, OCIE will review
whether mutual funds with significant exposure to interest rate
increases have in place sufficient compliance policies and
procedures and investment and trading controls to confirm that fund
disclosures are not misleading and that investments and liquidity
profiles are aligned with those disclosures.
Assessing Market-Wide Risks
OCIE's priorities also focus on evaluating market trends
that present risks to maintaining fair, orderly, and efficient
markets. OCIE intends to continue monitoring the largest U.S.
broker-dealers and asset managers to evaluate risks at individual
firms and to stay ahead of industry-wide developments. In addition,
OCIE will continue to conduct annual examinations of clearing
agencies designated systematically important under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, with areas for
review decided through a risk-based approach with other
regulators.
OCIE will continue to examine the cybersecurity compliance and
controls of investment advisers and broker-dealers and will expand
this effort to transfer agents. OCIE will assess firms'
potential equity order routing conflicts as well.
Using Data Analytics
OCIE has made significant enhancements in data analytics over
the past several years that allow it to more effectively and
efficiently analyze available data. These enhancements are now
shaping OCIE's enforcement priorities. OCIE intends to use its
capabilities to examine registrants and firms that may be engaged
in potential illegal activity.
For example, OCIE will use data analytics to identify recidivist
representatives and the firms that employ them and to examine
broker-dealers and transfer agents whose activities suggest they
may be engaging in, or aiding and abetting, pump-and-dump schemes
or market manipulation. OCIE will also analyze data to identify
introducing brokers and registered representatives potentially
engaging in excessive trading and to enhance its reviews of the
anti-money-laundering programs of clearing and introducing
broker-dealers.
Additional Priorities
OCIE also indicated that it expects to allocate resources to
other priorities, including examinations of newly registered
municipal advisors regarding their compliance with recent SEC and
Municipal Securities Rulemaking Board rules and focused, risk-based
examinations of never-before-examined investment companies. In
addition, OCIE will examine:
- select proxy advisory service firms, including their recommendations on proxy voting and disclosures and mitigation of potential conflicts of interest;
- fees and expenses paid to advisers to private equity funds; and
- transfer agents, particularly those involved with private offerings and microcap securities.
Finally, financial firms should be advised that OCIE'S 2015
examination priorities identified by OCIE are not exhaustive and
may be adjusted in light of market conditions, industry
developments, and OCIE's ongoing risk assessment
activities.
Please contact the authors for information regarding the OCIE
examination process and strategies to prepare for such
examinations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
