The Securities and Exchange Commission (SEC) recently announced the 2016 examination priorities of its Office of Compliance Inspections and Examinations (OCIE). OCIE's 2016 examination areas primarily reflect a continuation of three thematic areas identified in 2015: (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. Additionally, the SEC identified several new areas of examination focus, including liquidity controls, public pension advisers, product promotion, and "two popular investment products" – exchange-traded funds (ETFs) and variable annuities.
In announcing these priorities, OCIE Director Marc Wyatt expressed hope that OCIE's continuing disclosure of its exam priorities will encourage regulated entities "to inform the evaluation of their own compliance programs in these key areas." Meanwhile, SEC Chair Mary Jo White touted the new areas of exam focus as "extremely important to investors and financial institutions across the spectrum."
Protecting Retail Investors and Saving for Retirement
OCIE noted that protecting retail investors and retirement savers will likely remain a focus "for the foreseeable future." OCIE is continuing several initiatives from previous years, and expanding to focus on new areas in 2016. One new area of focus for 2016 is ETFs. OCIE will examine ETFs for compliance with statutory and regulatory requirements, as well as the unit creation and redemption process. OCIE will also focus on trading practices, disclosures, and sales strategies involving ETFs. Another new focus is the sale of variable annuities, which have become common in retirement and investment plans. OCIE will assess the suitability of variable annuity sales to investors, including the adequacy of disclosures and supervision of sales. A third new focus is on public pension advisers, particularly the risks of pay-to-pay and the identification of undisclosed gifts and entertainment.
OCIE will continue several programs and initiatives from prior years, including the ReTIRE program launched in June 2015, which examines the services offered for retirement accounts by registered investment advisers and broker-dealers. OCIE will continue to focus on fee selection and reverse churning, as well as the supervision of branch office broker-dealers and investment advisers.
Assessing Market-Wide Risks
OCIE's efforts in maintaining fair, orderly, and efficient markets include a continuation and expansion of its cybersecurity initiative, which examines cybersecurity compliance and controls of broker-dealers and investment advisers. In 2016, OCIE intends to test and assess firms' implementation of required cybersecurity procedures and controls. A new extension of OCIE's focus on cybersecurity is Regulation Systems Compliance and Integrity (Regulation SCI).
Regulation SCI entities, which include certain self-regulatory organizations and alternative trading systems, will be examined to determine whether they have properly implemented Regulation SCI, including resilient primary and back-up data centers, and whether security operations are appropriately tailored to risks. OCIE will also concentrate on liquidity controls, and will examine advisers to private funds, ETFs, and mutual funds that have exposure to potentially illiquid fixed income securities. Finally, OCIE will continue to conduct annual examinations of clearing agencies designated as systemically important, pursuant to the requirements of the Dodd-Frank Act.
Using Data Analytics
OCIE will continue to use its data analytics to assist ongoing examination initiatives. Continuing initiatives include recidivist representatives and their employers, anti-money laundering, microcap fraud, excessive trading, and product promotion. For example, OCIE will leverage its data analytics ability to examine the compliance oversight and controls of investment advisers that employ individuals after they have been disciplined or barred from a broker-dealer. OCIE will further use data analytics to examine AML programs, focusing on firms that have not filed a number of suspicious activity reports (SARs) that would be consistent with their business models.
Finally, OCIE expects to allocate examination resources to additional priorities, including municipal advisors, private placements, never-before-examined investment advisers and investment companies, private fund advisers, and transfer agents. These efforts will include reviewing private placement offerings involving Regulation D or the Immigrant Investor Program, also known as the EB-5 Program, which offers a path to legal residency for foreign investors making qualified commercial investments in the United States. OCIE will also examine fees and expenses charged by private fund advisers, and evaluate such advisers' controls and disclosures for side-by-side management of performance-based and purely asset-based fee accounts. The examination of transfer agents will focus on, among other things, transfer agents providing paying agent services for their issuers, with a particular focus on safeguarding security-holder funds.
In conclusion, OCIE continues to include broker-dealers, RIAs, and private funds on its list of priorities, with issues ranging from retail sales to market risk. However, financial firms should be advised that OCIE'S 2016 examination priorities 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.