United States: Regulators Outline Examination And Rule-Making Priorities For 2016

As the new year got underway, U.S. regulators gave the industry a glimpse into their plans for 2016. The Securities and Exchange Commission ("SEC") released its 2016 investment adviser examination priorities and rule-making priorities, while the Financial Industry Regulatory Authority ("FINRA") issued its own examination priorities for the year ahead.

Many of the areas that face ongoing or additional scrutiny are directly linked to the alternative investment sector. As a result, private fund advisers and securities firms should be aware of which areas will be subject to regulators' scrutiny so that they may review and/or update their policies and procedures in these areas to address the SEC's and FINRA's concerns in this regard.

In its 2016 examination priorities, the SEC's Office of Compliance Inspections and Examinations ("OCIE") outlined two primary areas of interest that would impact private fund advisers:

Assessing marketwide risks; and

Using data analytics to identify potential illegal activity.

As part of the SEC's mandate to provide fair, orderly and efficient markets, OCIE's inspections will seek to identify "structural risks and trends that may involve multiple firms or entire industries." It further specified that its marketwide risks examinations will include the areas of cybersecurity and liquidity controls, among others.

Cybersecurity became one of the SEC's key compliance issues in 2015, and the regulator has provided notice that its focus on cybersecurity will continue in 2016. OCIE indicated that it will advance an examination of broker-dealers' and investment advisers' cybersecurity compliance and controls, previously launched in September 2015, to gather information, assess risks and test implementation at select firms. OCIE is now ready to begin more widespread testing and assessments of firms' implementation of cybersecurity procedures and controls.

The regulator's emphasis on liquidity control comes amid recent turmoil in fixed-income markets and a rising interest rate environment. The examinations will focus on investment advisers to, among others, private funds with analysis of their exposure to illiquid securities. Accordingly, registered investment advisers should review their contractual obligations to their investors with respect to liquidity and ensure they are providing adequate disclosure to their investors regarding the risk or liquidity in a portfolio.

With respect to the use of data analytics, OCIE stated that data and intelligence from regulatory filings and examinations alike will be used across all of its examination priorities in order to assist in the identification of higher risk restraints. This will include setting their sights on registrants that employ individuals that OCIE has identified, through their data analytics, as having a track record of misconduct. In addition, OCIE intends to utilize its data-driven analysis to identify firms engaged in excessive or otherwise potentially inappropriate trading, as well as the suitability of promotional practices for new, complex and high-risk products.

Among its "Other Initiatives" for 2016, OCIE noted that it will review private placements to determine whether legal requirements are fulfilled regarding matters related to due diligence, disclosure and suitability under Regulation D of the Securities Act of 1933.

Finally, select never-before-examined registered investment advisers will continue to be the subject of focused, risk-based examinations, while the SEC will continue its focus on private fund advisers' fees and expense practices, along with the controls and disclosure associated with side-by-side management of performance-based and purely asset-based fee accounts.

The SEC's rule-making initiatives for 2016 also represent a continuation of its efforts from the previous year. David Grim, director of the SEC's Division of Investment Management, announced that the SEC is developing recommendations on several issues relevant to registered investment advisers, including requiring transition planning to prepare for a major disruption in their business, stress testing by large investment advisers and a proposal to obligate registered investment advisers to establish a program of third-party compliance reviews.

FINRA's 2016 regulatory and examination priorities share many of OCIE's examination areas, such as a focus on cybersecurity and liquidity. However, the 2016 priorities of the self-regulatory group demonstrate a greater focus on culture, conflicts of interest and ethics at securities firms. FINRA stated that, as part of the examination process, it will seek to understand how culture affects firms' compliance and risk management practices. As such, its assessments will focus on the frameworks used to develop, communicate and evaluate conformance with a firm's culture.

In 2016, FINRA will focus its supervision, risk-management and controls efforts on four areas related to firms' business conduct and the integrity of the markets. Two of the areas that are of particular interest are those governing the management of conflicts of interest and cybersecurity.

With respect to conflicts of interest, FINRA will continue to focus on firms' efforts to "identify, minimize and mitigate information leakage within or outside a firm," and it stated that firms will be expected to manage such potential activities with targeted controls. In addition, FINRA stated that conflicts may also arise when proprietary traders are permitted to provide valuations for proprietary positions they establish. "This valuation can implicate both a firm's risk management processes, as well as the trader's performance assessment and compensation," FINRA stated. As a result, another area of focus will be assessing firms' supervision, control and validation of traders' pricing of illiquid, level 3 assets to ensure that positions are fairly valued.

Finally, FINRA will continue to focus on firms' cybersecurity preparedness, given the ongoing threat environment and the continued need for firms to improve their defenses. FINRA will review firms' approaches to cybersecurity risk management, including governance, risk assessment, technical controls, incident response, vendor management, data loss prevention and staff training.

Although the areas discussed above will continue be part of the regulatory list of hot-button items for the coming year, regulators will also continue to take a risk-based approach to examinations, and adapt as information and market developments warrant. Accordingly, private fund advisers should stay alert to additional statements from these regulatory bodies as the year progresses.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Herrick, Feinstein LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Herrick, Feinstein LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions