The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced its 2020 examination priorities. OCIE has been publishing its examination priorities annually in an effort to enhance the transparency of its examination program and to provide insights into its approach to examination. With its current risk-based approach, the exam priorities highlight areas that OCIE thinks present greater potential risks to investors and the integrity of the U.S. capital markets.
OCIE identified eight overarching priority areas
1. Retail Investors, Including Seniors and Those Saving for Retirement – OCIE again will focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest.
2. Information Security – OCIE will continue to prioritize cyber and other information security risks across the entire examination program.
3. Financial Technology and Innovation, Including Digital Assets and Electronic Investment Advice – OCIE will keep a close eye on those in the digital asset space, as well as RIAs that provide services to clients through automated investment tools and platforms, often referred to as “robo-advisers.”
4. Focus Areas Relating to Investment Advisers, Investment Companies – OCIE will continue its risk-based examinations for each type of these registered entities. In particular, examinations of registered investment advisers will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds. Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs, and the oversight practices of their boards of directors.
5. Focus Areas Relating to Broker-Dealers, and Municipal Advisors – OCIE will continue its risk-based examinations for each type of these registered entities. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent rulemaking, along with trading practices. Municipal advisor examinations will include review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.
6. Anti-Money Laundering Programs – OCIE will continue to review for compliance with applicable anti-money laundering requirements, including whether entities are appropriately adapting their AML programs to address their regulatory obligations.
7. Market Infrastructure – OCIE will continue its focus on entities that provide services critical to the functioning of our capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. Particular attention will be focused on the security and resiliency of entities’ systems.
8. FINRA and MSRB – OCIE will continue its oversight of the Financial Industry Regulatory Authority by focusing examinations on FINRA’s operations, regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also continue to examine the Municipal Securities Rulemaking Board to evaluate the effectiveness of its operations and internal policies, procedures, and controls.
As for private funds, on page 16 of the Priorities:
“OCIE will continue to focus on RIAs to private funds that have a greater impact on retail investors, such as firms that provide management to separately managed accounts sideby-side with private funds. Moreover, OCIE will review RIAs to private funds to assess compliance risks, including controls to prevent the misuse of material, non-public information and conflicts of interest, such as undisclosed or inadequately disclosed fees and expenses, and the use of RIA affiliates to provide services to clients.”
As for examination coverage:
“OCIE has increased its examination coverage of RIAs over the past several years from 10 percent in FY 2014 to a high of 17 percent in FY 2018. OCIE’s coverage of RIAs in FY 2019, a year in which the RIA population continued to increase and the SEC experienced a 35-day lapse in appropriations, was 15 percent.”
If these priorities sound familiar, they are not very different from the 2019 priorities. I think that’s because it’s the right set of priorities using a risk-based approach.
The 2021 priorities may change with the regulatory pipeline. The changes in marketing and Regulation BI will alter the compliance landscape.
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