The Securities and Exchange Commission (SEC) announced the 2015 examination priorities of the Office of Compliance Inspections and Examinations (OCIE) on January 13, 2015. OCIE's 2015 priorities focus on broker-dealers, investment advisers, and transfer agents and target three areas: (1) protecting retail investors and investors saving for retirement; (2) assessing market-wide risks; and (3) utilizing data analytics to identify and examine potential illegal activity.
In announcing these priorities, OCIE proclaimed it is the "eyes and ears of the SEC" and that it will allocate significant resources to these examination issues in 2015. In addition, OCIE said the priorities were derived with input from senior officials across the agency (including from Enforcement and the Regional Offices, as well as the Commissioners themselves). As such, the OCIE staff assuredly will be looking during examinations to uncover problems in these priority areas to refer to the Enforcement Division. To protect themselves, financial firms should closely review the priorities, perform a critical risk assessment related to each priority, and promptly correct any identified deficiencies in these areas.
Protecting Retail Investors and Investors Saving for Retirement
OCIE noted two trends motivating its initiatives to protect retail investors and investors saving for retirement. First, retail investors are being offered new products and services characterized in the past as "institutional" or "alternative" – for example, illiquid investments and structured products intended to generate higher yields in a low-interest rate environment. Second, the industry is offering investors saving for retirement a wide variety of information and advice to aid in planning for, as well as living in, retirement.
In reaction to these trends, OCIE announced examination initiatives to, among other things:
- scrutinize fee selection and reverse churning;
- assess registrants' sales practices when recommending movement of retirement assets, particularly when they charge higher fees and present higher risks; and
- evaluate the suitability of registered entities' recommendations or determinations to invest retirement assets in complex or structured products and higher yield securities.
OCIE also expects to examine registered entities' supervision of registered representatives and financial adviser representatives in branch offices.
OCIE intends to continue to evaluate funds offering "alternative" investments and utilizing alternative strategies. In this context, OCIE will examine the adequacy of internal controls; leverage, liquidity, and valuation policies and practices; and the methods funds use to market to investors. In response to the expected rise in interest rates, OCIE will review whether mutual funds with significant exposure to interest rate increases have in place sufficient compliance policies and procedures and investment and trading controls to confirm that fund disclosures are not misleading and that investments and liquidity profiles are aligned with those disclosures.
Assessing Market-Wide Risks
OCIE's priorities also focus on evaluating market trends that present risks to maintaining fair, orderly, and efficient markets. OCIE intends to continue monitoring the largest U.S. broker-dealers and asset managers to evaluate risks at individual firms and to stay ahead of industry-wide developments. In addition, OCIE will continue to conduct annual examinations of clearing agencies designated systematically important under the Dodd-Frank Wall Street Reform and Consumer Protection Act, with areas for review decided through a risk-based approach with other regulators.
OCIE will continue to examine the cybersecurity compliance and controls of investment advisers and broker-dealers and will expand this effort to transfer agents. OCIE will assess firms' potential equity order routing conflicts as well.
Using Data Analytics
OCIE has made significant enhancements in data analytics over the past several years that allow it to more effectively and efficiently analyze available data. These enhancements are now shaping OCIE's enforcement priorities. OCIE intends to use its capabilities to examine registrants and firms that may be engaged in potential illegal activity.
For example, OCIE will use data analytics to identify recidivist representatives and the firms that employ them and to examine broker-dealers and transfer agents whose activities suggest they may be engaging in, or aiding and abetting, pump-and-dump schemes or market manipulation. OCIE will also analyze data to identify introducing brokers and registered representatives potentially engaging in excessive trading and to enhance its reviews of the anti-money-laundering programs of clearing and introducing broker-dealers.
OCIE also indicated that it expects to allocate resources to other priorities, including examinations of newly registered municipal advisors regarding their compliance with recent SEC and Municipal Securities Rulemaking Board rules and focused, risk-based examinations of never-before-examined investment companies. In addition, OCIE will examine:
- select proxy advisory service firms, including their recommendations on proxy voting and disclosures and mitigation of potential conflicts of interest;
- fees and expenses paid to advisers to private equity funds; and
- transfer agents, particularly those involved with private offerings and microcap securities.
Finally, financial firms should be advised that OCIE'S 2015 examination priorities identified by OCIE are not exhaustive and may be adjusted in light of market conditions, industry developments, and OCIE's ongoing risk assessment activities.
Please contact the authors for information regarding the OCIE examination process and strategies to prepare for such examinations.