During last week’s SEC Speaks conference, SEC Staff discussed examination and enforcement priorities, its increasing use of data aggregation and sophisticated technology and coordination efforts to proactively address potential issues in the early stages.
For broker-dealers, the Staff identified four specific areas of focus:
- Churning and excessing trading,
- Anti-money laundering (AML),
- Retail investors investing in alternative or more sophisticated products, and
- Retirement account rollovers and transfers.
See Examination Priorities For 2015, SEC Office of Compliance Inspections and Examinations (Jan 13, 2015).
While these priorities are consistent with the SEC’s overall examination priorities, the Staff provided conference participants with additional information regarding the Staff’s focus, including why these are continued areas of interest and how the Staff intends to review related conduct.
Big Data
Throughout the conference, SEC Staff stressed the use of “big data” – e.g., data aggregation and analytics, enhanced technology, and internal and external coordination efforts to better identify and proactively address issues. By way of example, OCIE’s Risk Analysis Examination Group (RAE) has continued its efforts to leverage clearing firm examinations for the purpose of identifying potentially problematic introducing firm activities. The RAE team gathers data from the largest clearing firms and analyzes this information through specific queries established by the Staff that are designed to identify potential red flags.
By collecting trade and money movement information from approximately 14 clearing firms the Staff is able to test activities of over 2600 introducing broker-dealers. The RAE team analyzes activities of individual introducing firms and trends implicating multiple firms. Areas of focus include: churning, suitability, excessive fees, AML, margin, parking, insider trading and favoring of proprietary products. The Staff did not discuss how this technology differs from FINRA’s INSITE surveillance program or the current CARDS proposal. The Staff also confirmed that the RAE team’s efforts have resulted in successful referrals to offices for further review and enforcement. Again, while not addressed by the Staff, the scope and breadth of information gathered through RAE appears to exceed that of FINRA’s INSITE and likely presents some of the concerns presented by FINRA’s proposed CARDS.
SAR filing practices
The Staff also addressed AML as a continuing examination priority and area of focus for enforcement. The Staff discussed how data aggregation and analytics also have enhanced reviews of suspicious activity report (SAR) filing practices. The Staff’s dedicated Bank Secrecy Act group recently conducted a review of all SAR filings submitted over a one year-period. This review identified discrepancies in SAR filing practices, including the number of SARs filed, late filings, and the quality of information provided within the SAR filing. As part of this analysis, the Staff considered peer firm filings and risk-based attributes of firms (e.g., number of representatives, disciplinary history, business model, business lines). Outliers were identified and referred to offices and presumably enforcement, as warranted. In addition to other outliers, the Staff focused on firms with no-SAR filings and requested that firms explain the lack of filings. The Staff reiterated the importance of SARs to the SEC’s programs and stressed that they will continue closely monitoring SAR filing practices.
SEC priorities
The Staff also provided additional insight on upcoming examinations. Broker-dealers can expect a 50 percent increase in branch examinations. These reviews will be risk-based and focus on rogue brokers, migrations of registered persons, captive and non-captive sales forces, and direct sales.
Seniors and the transfer of retirement monies continue to be a significant area of focus. Consistent with the Staff’s ongoing targeted reviews of IRA rollovers and similar retirement transfers, the Staff reiterated the focus on marketing efforts, fees, discussion and transparency of the same, suitability and supervision of these efforts and business.
