RIA Compliance Consultant. The Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) has now published its examination priorities for 2018. Their five themes are included here and below is the detail:
- Matters of importance to retail investors and seniors
- Compliance and risks in critical market infrastructure
- FINRA and MSRB
- Cybersecurity; and
- Anti-Money Laundering programs.
Matters of importance to retail investors and seniors
Disclosure of the Costs of Investing: Examiners will review, among other things, whether fees and expenses are calculated and charged in accordance with the disclosures provided to investors. They will also review fees charged to advisory accounts, particularly where the fee is dependent on the value of the account, to assess whether assets are valued in accordance with investor agreements, disclosures, and the firm’s policies and procedures.
Electronic Investment Advice: Examiners will continue their review of investment advisers and broker-dealers that offer investment advice through automated or digital platforms (robo-advisors) and will focus on registrants’ compliance programs, including the oversight of computer program algorithms that generate recommendations, marketing materials, investor data protection, and disclosure of conflicts of interest.
Wrap Fee Programs: Examiners continue to examine registered investment advisers and broker-dealers associated with wrap fee programs, which charge investors a single bundled (wrapped) fee based on a percentage of assets for investment advisory and brokerage services. They will review whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients. Areas of interest will include whether:
- the recommendations to invest in a wrap fee program and to continue in the program are reasonable,
- conflicts of interests are disclosed in compliance with applicable regulatory requirements, and
- investment advisers are obtaining best execution and disclosing costs associated with executing trades through another broker-dealer
Never-Before-Examined Investment Advisers: Examiners will continue to review both newly registered advisers or those advisers that have not been examined in some time. The examiners will make risk-based assessments and select those investment advisers for examination that have elevated risk profiles.
Senior Investors and Retirement Accounts and Products: Examiners will continue to conduct examinations of investment advisers and broker-dealers that offer services and products to investors with retirement accounts. These examinations will focus on, among other things, investment recommendations, sales of variable insurance products, and sales and management of target date funds.
Mutual Funds and Exchange Traded Funds (ETFs): Examiners will focus on mutual funds:
- that have experienced poor performance or liquidity in terms of their subscriptions and redemptions relative to their peer groups,
- that are managed by advisers with little experience managing registered investment companies, or
- that hold securities which are potentially difficult to value during times of market stress, including securitized auto, student, or consumer loans, or collateralized mortgage-backed securities. They will also focus on ETFs and mutual funds that seek to track custom-built indexes to review for any conflicts the adviser may have with the index provider and the adviser’s role with respect to the selection and weighting of index components.
With respect to ETFs, examiners focus will be on funds that have little secondary market trading volume and that face the risk of being delisted from an exchange and having to liquidate assets. The focus of these examinations will include analyzing whether investment risks are adequately disclosed to investors.
Municipal Advisors and Underwriters: Examiners will continue to examine municipal advisors to evaluate their compliance with registration, recordkeeping, and supervision requirements, particularly those municipal advisors that are not registered as broker-dealers. Examinations will also review for compliance with MSRB rules regarding professional qualification requirements, continuing education requirements, and core standards of conduct and duties of municipal advisors when engaging in municipal advisory activities.
Cryptocurrency, Initial Coin Offerings (ICOs), Secondary Market Trading, and Blockchain: The cryptocurrency and ICO markets have grown rapidly and present a number of risks for retail investors. Along with the growth of these products and markets, the number of broker-dealers and investment advisers engaged in this space continues to grow as well. Examiners will continue to monitor the sale of these products, and where the products are securities, examine for regulatory compliance. Areas of focus will include, among other things, whether financial professionals maintain adequate controls and safeguards to protect these assets from theft or misappropriation, and whether financial professionals are providing investors with disclosure about the risks associated with these investments, including the risk of investment losses, liquidity risks, price volatility, and potential fraud.
Compliance and Risks in Critical Market Infrastructure
Clearing Agencies: Examiners will continue to conduct annual examinations of clearing agencies that the Financial Stability Oversight Council has designated as systemically important and for which the Commission is the supervisory agency. Examinations will focus on compliance with the Commission’s Standards for Covered Clearing Agencies, whether clearing agencies have taken timely corrective action in response to prior examinations, and other areas identified in collaboration with the Division of Trading and Markets and with other regulators.
Focus on FINRA and MSRB
FINRA: Examiners will focus on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors that are also registered as broker-dealers.
MSRB: Examiners will examine the MSRB to evaluate the effectiveness of select operational and internal policies, procedures and controls.
Cybersecurity
Cybersecurity continues to be a priority with examiners. As in recent years, the examiners will continue to focus on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response. Examiners are focused on working with firms to identify and manage cybersecurity risks and to encourage market participants to actively and effectively engage in this effort.
Anti-Money Laundering Programs
Certain financial institutions are required by regulations adopted under the Bank Secrecy Act to establish anti-money laundering (AML) programs. These “AML program” rules require institutions (including the securities firms that are regulated such as broker-dealers and investment companies) to, among other things, establish written programs to identify their customers, perform customer due diligence, and monitor accounts for suspicious activity. Currently, registered investment advisors are not considered a financial institution subject to the Bank Secrecy Act. In 2018, examiners will continue to focus on whether the entities they regulate under the Bank Secrecy Act are appropriately adapting their AML programs to address their obligations. Their reviews will cover, for example, the customer due diligence requirement and will look to determine whether these entities are taking reasonable steps to understand the nature and purpose of customer relationships and to properly address risks.
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