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1/13/16 - SEC Announces Exam Priorities for 2016

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations on Jan. 11 released its “Examination Priorities for 2016.” Institutions such as investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges should consider the exam priorities when designing their own 2016 compliance programs. OCIE said it will focus its attention on areas like liquidity controls, public-pension advisers, product promotion, exchange-traded funds, and variable annuities. Three main themes emerge from this year’s exam priorities: protecting retail and retirement investors, assessing marketwide risks, and using data analytics to identify signs of potential illegal activity.

Retail Investors

Protecting retail investors continues to be a priority. OCIE will pursue this exam objective by conducting risk-based reviews of retirement investments, ETFs, branch offices, fee selection, variable annuities, and public-pension advisers. This review program will include the following:

  • Retirement-Targeted Industry Reviews and Examinations, or the ReTIRE initiative — OCIE will continue this multiyear initiative examining retirement accounts at broker-dealers and registered investment advisers and reviewing their reasonable-basis recommendations, conflict-of-interest prevention, supervision and compliance controls, and marketing practices.
  • ETFs — OCIE will review ETFs for compliance with the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and focus on the process for unit creation and redemptions, sales strategies, trading practices, and disclosures.
  • Branch Offices of Broker-Dealers — OCIE intends to review the adequacy of firms’ supervision of their branch offices and will target registered representatives who appear to be engaged in inappropriate trading.
  • Fee Selection and Potential Reverse Churning — Exams will focus on recommendations for account types and services provided, as well as on fees and investor disclosures.
  • Variable Annuities — OCIE plans to review sales practices for variable annuities, assessing product suitability, adequacy of disclosure, and supervision.
  • Public-Pension Advisers — OCIE will examine advisers to municipalities and other government entities and scrutinize incentives to identify potential pay-to-play schemes, such as those involving undisclosed gifts and entertainment.

Marketwide Risks

OCIE plans to examine firms for any structural risks they pose and to gauge broader risks involving several firms or entire industries. The office’s main areas of attention will be cybersecurity, requirements of Regulation Systems Compliance and Integrity (or Reg SCI), liquidity controls, and clearing agencies.

  • Cybersecurity — OCIE will continue reviewing firms’ cybersecurity compliance and controls and testing and assessing related policies and procedures.
  • Reg SCI — OCIE will review entities subject to Reg SCI to ensure they establish, maintain, and enforce written policies and procedures that are reasonably designed to ensure the capacity, integrity, resiliency, availability, and security of their SCI systems.
  • Liquidity Controls — OCIE plans to examine advisers to mutual funds, ETFs, and private funds that have exposure to potentially illiquid fixed-income securities, along with broker-dealers that provide bond-market liquidity, and focus on these firms’ controls for managing liquidity and market risk, valuation practices, trading activities, and levels of regulatory capital.
  • Clearing Agencies — OCIE will continue to conduct risk-based annual exams of clearing agencies that the Financial Stability Oversight Council has designated as systemically important financial institutions.

Data Analytics

OCIE intends to strategically analyze data for areas of potential high risk and illegal behavior. The office will use data analytics to focus on anti-money-laundering compliance, microcap fraud, excessive trading, and inappropriate product promotion, among other things.

Other Initiatives

The 2016 exam priorities also note that OCIE expects to devote examination resources to investment advisers and investment companies that have never before come under examination, municipal advisers, private placements, advisers to private funds, and transfer agents.

How Promontory Can Help

Promontory helps broker-dealers, investment advisers, investment companies, transfer agents, clearing agencies, and other financial institutions meet their compliance obligations. Please call us to discuss how your firm can review its compliance programs in light of OCIE’s 2016 exam priorities. For more information, please contact:

Conway Dodge
Managing Director, Washington, D.C.
+1 202 370 0461

Michael Sullivan
Director, Washington, D.C.
+1 202 370 0507

Jacob Lesser
Director, Washington, D.C.
+1 202 370 0397