On January 11, 2016, the SEC published its Office of Compliance Inspections and Examinations’ (“OCIE”) 2016 exam priorities. The exam priorities address issues involving a variety of financial institutions, including investment advisers, broker-dealers, transfer agents and clearing agencies. OCIE selected its priorities after discussions with the SEC’s Commissioners, the SEC’s policy divisions and regional offices, the Division of Enforcement, the SEC’s Investor Advocate and other regulators. As with the 2015 exam priorities, the 2016 exam priorities are organized under three topics: (1) protecting retail investors, including investors saving for retirement; (2) assessing market wide risks and (3) using data analytics to identify potential illegal activity.
Retail investors and saving for retirement
OCIE stated that protecting retail investors, including investors saving for retirement, continues to be a priority for OCIE and it will likely to continue to be one for the foreseeable future. Specifically, OCIE noted that it will continue to work on a multi-year examination initiative, launched in 2015, that focuses on the services investment advisers and broker-dealers offer to investors with retirement accounts. OCIE also plans to examine Exchange Traded Funds (“ETFs”) for compliance with applicable exemptive relief granted under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and review ETFs’ unit creation and redemption process. OCIE will also focus on ETF sales strategies, trading practices and disclosure practices. In addition, OCIE stated that it will continue to examine investment advisers and dually registered investment advisers and broker-dealers that offer retail investors different fee arrangements (e.g., asset-based fees, hourly fees, wrap fees and commissions). OCIE said that it will focus on whether recommendations of particular account types are in the best interests of the retail investors. OCIE also noted that it will assess the suitability of sales of variable annuities to investors, as well as the adequacy of disclosure and the supervision of such sales.
Market wide risks
In its exam priorities, OCIE also stated that it will examine structural risks and trends that may involve multiple firms or entire industries. Specifically, OCIE said that it would continue to focus on cybersecurity by testing and assessing firms’ implementation of cybersecurity procedures and controls. In addition, OCIE said that it planned to examine advisers to mutual funds, ETFs and private funds with exposure to potentially illiquid fixed income securities. OCIE also plans to examine broker-dealers that have become new or expanded liquidity providers to the market. Further, OCIE stated that it would continue to conduct risk-based annual exams of clearing agencies that have been designated systemically important pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Data analytics to identify illegal activity
OCIE also noted that in all of its examination initiatives, OCIE uses data and intelligence from its own examinations, as well as from regulatory filings, to identify registrants that have elevated risk profiles. OCIE stated it will continue to use its analytic capabilities to identify individuals with a history of misconduct and examine firms that employ them. In addition, OCIE will continue to examine broker-dealers’ anti-money laundering programs using analytic capabilities to focus on firms that have not filed the number of suspicious activity reports (“SARs”) that would be consistent with their business models. OCIE will also continue to analyze data to identify and examine firms and their employees that appear to be engaged in excessive or inappropriate trading. Further OCIE plans to focus on detecting the promotion of complex and high risk products to identify any potential suitability issues or breaches of fiduciary duty.
OCIE noted that the priorities published are not exhaustive and OCIE also intends to conduct examinations focused on risks, issues and policy matters arising from market developments and new information learned from examinations, complaints, referrals and coordination with other regulators.