Compliance February 27, 2013

SEC Releases 2013 Exam Priorities

Among its exam priorities, the Securities Exchange Commission (SEC) listed sales practices, fraud, and compliance for advisers registered as broker/dealers.
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The SEC’s examination priorities for 2013 cover a range of issues at financial institutions, including broker/dealers, clearing agencies, exchanges, self-regulatory organizations, investment companies, hedge funds, private equity funds, and transfer agents.

Publishing the priorities is intended to promote compliance and communicate with investors and registrants about areas that the SEC perceives to have heightened risk, said Carlo V. di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, which is responsible for the national examination program.

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“Our examination program constantly seeks new ways to share our perspectives on key risks and regulatory issues so that registrants’ senior management, compliance and risk managers, among others, can take effective action,” di Florio said. “This document, as well as our Risk Alerts and other public statements, are windows through which we can increase transparency, strengthen compliance, and inform the public and the financial services industry about key risks that we are monitoring and examining.”

Issues that span the entire market as well as ones that relate specifically to particular business models and organizations are addressed. Market-wide priorities include fraud detection and prevention, corporate governance, enterprise risk management, conflicts of interest, and technology controls.

(Cont’d…)

Priorities in each area include:

  • Investment advisers and investment companies: Presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds;
  • Broker/dealers: Sales practices and fraud, and compliance with the new market access rule;
  • Market oversight: Risk-based examinations of securities exchanges and FINRA, and order-type assessment; and 
  • Clearing and settlement: For transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets. For clearing agencies designated as systemically important, conduct annual examinations as required by the Dodd-Frank Act.

 

The priority list is not exhaustive and priorities may be adjusted throughout the year in light of ongoing risk assessment activities.

Senior exam staff, management from the SEC’s 12 regional offices, and other SEC divisions and offices selected the examination priorities for 2013 in consultation with each of the commissioners, based upon information and risk analytics, including:

  • Tips, complaints and referrals, including from whistleblowers, customers and investors;
     
  • Information reported by registrants in required filings with the Commission;
     
  • Information gathered through examinations conducted by the SEC and other regulators;
     
  • Communications with other U.S. and international regulators and agencies;
     
  • Industry and media publications;
     
  • Data maintained in third-party databases; and  
  • Interactions with registrants, industry groups, and service providers (outside of examinations).
Compliance February 26, 2013

ASPPA Asks for More Roth Conversion Guidance

Provisions of the American Taxpayer Relief Act of 2012 (ATRA 2012), which expanded the availability of in-plan Roth conversions, increased the need for additional regulatory guidance.
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In particular, the American Society of Pension Professionals and Actuaries (ASPPA) request that the Internal Revenue Service (IRS) issue guidance confirming that the five-year period of participation required for a tax-free distribution from a Roth account that was created by an internal Roth conversion begins on the first day of the calendar year that contains the date of the conversion, or if earlier, the date of the first designated Roth contribution to the plan.  

In a comment letter, ASPPA explained that Internal Revenue Code section 402A specifies that a distribution from a designated Roth account is “qualified” and not subject to income tax only if it is made following a five-taxable-year aging period (the “Nonexclusion Period”). A fair reading of the statute and Congressional intent would indicate that the Nonexclusion Period for amounts internally rolled-over to a Roth account begins on the January 1st of the year that the In-Plan Roth Rollover contribution was made.   

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However, ASPPA not4ed, an informal IRS response to a question at the 2011 ASPPA Annual Conference reached a contrary result on the basis that a rollover is not a contribution for purposes of starting the Nonexclusion Period.   

The letter contends that Congress’ recent passage of the American Taxpayer Relief Act of 2012, effectively expanding the availability of in-plan Roth conversions by allowing for such conversions with respect to non-Roth funds that are not currently distributable (see “The Increased Availability of Roth In-Plan Conversions”), provides further support that the intent of Congress is to freely permit and encourage conversions.   

“Guidance affirming that the five-year aging period for a qualified distribution begins on the first day of the calendar year in which the IRR was contributed or “converted” within the Plan would be consistent with this and further Congressional intent,” the letter says.

 

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