On January 13, 2015, the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) announced its 2015 examination priorities:
OCIE’s priorities are grouped in three primary categories:
1. Retail investors and savings for retirement
- Fee selection and reverse churning. For investment advisers and firms registered as both broker-dealers and investment advisers, recommendations of account types and fee arrangements at the inception of the relationship and on a continuing basis, and related disclosures.
- Sales practices. Recommendations to move retirement assets from employer-sponsored defined contribution plans into other investments and accounts that may have higher fees or greater risks.
- Suitability. Recommendations to invest retirement savings in complex products or higher yielding securities, including due diligence, disclosures and suitability.
- Branch offices. Use of data analytics to identify branch office personnel deviating from firms’ compliance practices.
- “Alternative” investment companies. Examination of mutual funds investing in alternative asset classes with a focus on (i) leverage, liquidity, and valuation policies and practices; (ii) adequacy of the funds’ internal controls and (iii) manner in which such funds are marketed.
- Fixed income investment companies. With the prospect of increasing rates, examining whether firms’ procedures and controls are sufficient to ensure that their disclosures are consistent with their actual investments and liquidity profiles.
2. Market-wide risks
- Large firm monitoring. For the purpose of assessing risk and to gain early awareness of industry-wide developments.
- Clearing agencies. Annual examinations of all systemically important clearing agencies.
- Cybersecurity. Continuation of last year’s program with broker-dealers and investment advisers, and extension to transfer agents.
- Potential equity order routing conflicts. Whether prioritization of trading venues based on credits for order flow conflict with best execution duties.
3. The SEC’s use of data analytics to identify registrants engaged in illegal activity
- Recidivist representatives. Identification of individuals with track records of misconduct and examinations of the firms that employ them.
- Microcap fraud. Examination of the possible role of broker-dealers and transfer agent in pump-and-dump and market manipulation schemes.
- Excessive trading. Use of clearing firm data to identify introducing brokers and representatives engaged in excessive trading.
- Anti-money Laundering. Using analytics to identify firms that have failed to file or have filed incomplete suspicious activity reports (SARs). AML programs will also be examined that facilitate cash deposits and withdrawals and/or provide direct access to markets of higher-risk jurisdictions.
Other initiatives include:
- Examinations of newly registered municipal advisors.
- How proxy advisory firms formulate recommendations and how investment advisers fulfill their fiduciary duties in proxy voting practices involving clients.
- Never before examined investment companies.
- Fees and expenses charged by investment advisers to private equity funds.
- Role of transfer agents in preventing registration violations, especially in connection with microcap securities and private offerings.