The Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) has released its 2018 examination priorities. The report focuses on five areas: (1) Retail Investors; (2) Critical Market Infrastructure; (3) FINRA and MSRB; (4) Cybersecurity; and (5) Anti-Money Laundering. This article provides a summary of the report and highlights key areas for investment advisors and broker-dealers to focus on during the upcoming year.
Retail Investors, Including Senior and those Saving for Retirement
The OCIE is focused on protecting retail investors and ensuring that all fees, expenses, and other charges are properly disclosed to the client as well as any conflicts of interests that may exist. Business models receiving heightened scrutiny include those involving financial incentives and commissions, wrap fee programs, and automated robo-advisors.
Special focus will also be placed on “products and services directed at senior investors” including internal controls of representatives, investment recommendations, and management of target fund dates. High-risk mutual funds and ETFs, such as those with low liquidity, valuation difficulties, or that track custom-built indexes are also a priority. Municipal advisors and underwriters will be reviewed according to the Municipal Securities Rulemaking Board (“MSRB”) rules and broker-dealers’ best execution policies for fixed income products will also be examined. Cryptocurrency sales and compliance procedures will be monitored, including controls to protect assets from theft and disclosing risks to investors.
Compliance Risks in Critical Market Infrastructure
The OCIE will examine third party service providers such as clearing agencies and transfer agents to ensure they are meeting required standards. Other entities that will be monitored include national securities exchanges as well as regulation systems compliance and integrity (SCI) entities.
FINRA and MSRB
The Financial Industry Regulatory Authority (“FINRA”) and the MSRB’s operational and regulatory policies and procedures will be reviewed to maintain FINRA’s examination standards for broker-dealers and municipal advisors as well as ensure MSRB’s regulation of municipal securities firms.
Cybersecurity continues to be prioritized given its implications across the industry. The OCIE’s cybersecurity concerns include “governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.”
Anti-Money Laundering Programs
Examinations will also cover financial institutions’ anti-money laundering (AML) programs including performing customer identification and due diligence, timely and complete filings of suspicious activity reports, and independent testing of the AML program.
If you have any questions about how these exam priorities may apply to your firm, please contact your Gordian consultant.