SEC Reveals Familiar 2016 Exam Priorities

Each January the Securities and Exchange Commission signals its enforcement priorities for the coming 12 months—this year highlighting the importance of adviser transparency, cybersecurity and liquidity issues, among other familiar topics. 

The Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) has outlined its 2016 priorities.

OCIE describes itself as the “eyes and ears” of the SEC in its formal annual priorities update. To meet this job the regulator’s enforcement arm says it will be focusing on the same three broad thematic areas during 2016, with some tweaks. These include 1) examining matters of importance to retail investors, including investors saving for retirement; 2) assessing issues related to systemic market-wide risks; and 3) using its “evolving ability to analyze data” to identify and examine registrants that may be engaged in illegal activity.

According to OCIE, protecting retail investors and retirement savers remains a priority in 2016, “and it will likely continue to be a focus for the foreseeable future.” A big part of this focus is being driven by investors having to make more and more of their own decisions about investing and saving for retirement at the same time that the investment marketplace is getting more complex, OCIE says—an effect driven in large part by defined contribution (DC) plans’ ascendance over traditional pensions.

In another important note for the retirement planning market, OCIE says it will continue its ReTIRE initiative, launched in June 2015 and described as “a multi-year examination initiative focusing on SEC-registered investment advisers and broker/dealers and the services they offer to investors with retirement accounts.”

“We will continue this initiative,” OCIE says, “which includes examining the reasonable basis for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.”

Also important for retirement plan advisers to note, OCIE plans to “continue to review regulated entities’ supervision of registered representatives and investment adviser representatives in branch offices of SEC-registered investment advisers and broker/dealers, including using data analytics to identify registered representatives in branches that appear to be engaged in potentially inappropriate trading.”

NEXT:  Fee selection and reverse churning 

OCIE says one area of focus held over from 2015 is fee selection and reverse churning.

“We will continue to examine investment advisers and dually-registered investment adviser/broker-dealers that offer retail investors a variety of fee arrangements (e.g., asset-based fees, hourly fees, wrap fees, commissions),” OCIE says. “We will focus on recommendations of account types and whether the recommendations are in the best interest of the retail investor at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such arrangements.”

Regarding the public plans space, OCIE is still interested in “advisers to municipalities and other government entities, focusing on pay-to-play and certain other key risk areas related to advisers to public pensions, including identification of undisclosed gifts and entertainment.”

Given that variable annuities have become a part of the retirement and investment plans of many Americans, OCIE will focus on these too. “We will assess the suitability of sales of variable annuities to investors (e.g., exchange recommendations and product classes), as well as the adequacy of disclosure and the supervision of such sales,” OCIE warns.  

OCIE says its mission includes not only protecting investors and facilitating capital formation, “but also maintaining fair, orderly, and efficient markets.” Therefore in 2016 it will continue its initiative to examine broker/dealers’ and investment advisers’ cybersecurity compliance and controls. “In 2016, we will advance these efforts, which include testing and assessments of firms’ implementation of procedures and controls.”

Given the SEC’s recent announcement of proposed liquidity risk control rules, it should be no surprise another examination priority will be to “examine advisers to mutual funds, ETFs, and private funds that have exposure to potentially illiquid fixed-income securities. We will also examine registered broker/dealers that have become new or expanding liquidity providers in the marketplace. These examinations will include a review of various controls in these firms’ expanded business areas, such as controls over market risk management, valuation, liquidity management, trading activity, and regulatory capital.”

NEXT: Using data to find wrongdoing 

OCIE reminds industry practitioners that, in all of its examination initiatives, “including those highlighted in this section, we utilize data and intelligence from our own examinations, as well as from regulatory filings, to identify registrants that appear to have elevated risk profiles.”

For example, the OCIE in 2016 will “continue to use our analytic capabilities to identify individuals with a track record of misconduct and examine the firms that employ them.”

“We will continue to examine the operations of broker/dealers and transfer agents for activities that indicate they may be engaged in, or aiding and abetting, pump-and-dump schemes or market manipulation,” OCIE notes. “We will also assess whether broker/dealers are complying with their obligations under the federal securities laws when publishing quotes for or trading securities in the over-the-counter markets.”

OCIE concludes its exam priorities by noting it will additionally be focused on finding evidence of excessive trading and/or inappropriate product promotion.

“We will continue to analyze data, including data obtained from clearing brokers, to identify and examine firms and their registered representatives that appear to be engaged in excessive or otherwise potentially inappropriate trading,” OCIE says. “We will focus on detecting the promotion of new, complex, and high risk products and related sales practice issues to identify potential suitability issues and potential breaches of fiduciary obligations.”