On December 20, 2018, the Securities and Exchange Commission’s (“SEC’s”) Office of Compliance Inspections and Examinations (“OCIE”) published its annual examination priorities for 2019 (“2019 Priorities”). OCIE annually publishes its examination priorities to highlight the key areas it intends to focus on in the upcoming year. OCIE examines investment advisers, mutual funds and exchange traded funds, broker-dealers, transfer agents, clearing agencies, national securities exchanges, municipal advisors, the Financial Industry Regulatory Authority (“FINRA”), the Municipal Securities Rulemaking Board (“MSRB”), the Securities Investor Protection Corporation, and the Public Company Accounting Oversight Board.
The 2019 Priorities concentrate on the following six themes: (1) matters of importance to retail investors, including seniors and those saving for retirement; (2) registered entities responsible for critical market infrastructure, including clearing agencies, transfer agents, and national securities exchanges; (3) certain areas and programs of FINRA and the MSRB; (4) digital assets; (5) cybersecurity; and (6) anti-money laundering (“AML”) for broker-dealers.
While the list of priorities is not exhaustive (that is, OCIE isn’t limiting itself to these areas), the 2019 Priorities emphasize the Office’s new focus on digital assets and provide industry professionals with insight into what to expect from their OCIE Examinations this year.
Retail Investors
Part of OCIE’s mission is to promote compliance, prevent fraud, identify and monitor risk, and inform SEC policy. In keeping with that mission, the 2019 Priorities emphasize the protection of retail investors, with a specific focus on seniors and those saving for retirement. Accordingly, OCIE will continue to review the services and products offered to senior investors, concentrating on adviser compliance programs, the appropriateness of certain investment recommendations to seniors, and the supervision by firms of their investment professionals and other employees.
In addition , OCIE will continue to prioritize the examination of mutual funds and exchange traded funds (ETFs), the activities of their advisers, and the oversight practices of their boards of directors, reasoning that such funds “are the primary investment vehicle for many retail investors” and hence deserve especial attention.
The 2019 Priorities highlight advisers’ fiduciary duties, noting the risk of conflicts of interest. OCIE will focus in the coming year on ensuring that investment advisers are acting in a manner consistent with their fiduciary duties and meeting their contractual obligations to their clients.
Many of the subjects pertaining to retail investors are also relevant to advisers of institutional clients, private funds, and other non-retail clients. In particular, OCIE stresses that the proper disclosure and calculation of fees, expenses, and other charges investors pay is critical. Therefore, OCIE will review whether fees and expenses are calculated and charged in accordance with the disclosures provided to clients and investors in pertinent client agreements. This will include, for instance, a continued focus on investment advisers participating in wrap fee programs, with ongoing interest in brokerage practices and the adequacy of disclosures.
OCIE notes that a key component of investment adviser exams is reviewing portfolio management processes. OCIE will review a firm’s practices for executing investment transactions, fairly allocating investment opportunities among clients, ensuring consistency of investments with client objectives, disclosing critical information to clients, and complying with other legal restrictions.
Compliance and Risk in Registered Entities Responsible for Critical Market Infrastructure
OCIE will examine entities that provide services critical to the functioning of capital markets, with specific focus on their operational and compliance policies. For purposes of its 2019 Priorities, OCIE includes in that category : (1) clearing agencies; (2) entities subject to Regulation Systems Compliance and Integrity; (3) transfer agents; (4) and national securities exchanges.
Focus on FINRA and MSRB
OCIE’s examination of FINRA will concentrate on its operational and regulatory programs, in addition to the quality of FINRA’s examinations of broker-dealers and municipal advisors that are also registered as broker-dealers with the SEC. OCIE will correspondingly conduct inspections of MSRB to evaluate the effectiveness of its policies, procedures and controls.
Digital Assets
For the first time, OCIE promoted its monitoring of the digital asset market to a top-level priority . Noting the significant growth of market participants in digital assets, OCIE committed to continue monitoring the offering, selling, trading, and managing of digital assets. In addition, where digital assets are considered securities, OCIE will examine for regulatory compliance. OCIE will conduct examinations for firms actively involved in the digital asset market, focusing on portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.
Cybersecurity
Concerning cybersecurity, OCIE will concentrate on correct configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. Moreover, OCIE will place emphasis on cybersecurity practices at investment advisers with multiple branch offices, as well as those that have recently merged with other investment advisers. In addition, OCIE will focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
Anti-Money Laundering for Broker-Dealers
Broker-dealers can anticipate scrutiny of their compliance with AML requirements, specifically focusing on whether they are meeting suspicious activity report (“SAR”) filing obligations, properly implementing their AML program, as well as timely conducting independent tests of their AML program. 31 U.S.C. § 5318(g)(1), (4); 12 C.F.R. § 21.11(a), (b), (c). The goal of these examinations is to guarantee broker-dealers have adequate procedures in place to detect suspicious activity and illegal money laundering activities.
Conclusion
The 2019 Priorities reflect OCIE’s risk assessment in regard to capital markets and recent regulatory developments. OCIE emphasizes that this approach will remain flexible to allow it to address emerging and urgent risks that investors and the capital markets may face. Most notably, this is the first year that OCIE has so fervently emphasized the importance of examining SEC registrants’ use of digital assets.
Article by Chelsea Ellis