SEC Outlines Top Exam Priorities for 2016

Jan 19th 2016
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The US Securities and Exchange Commission's (SEC) newly released 2016 exam priorities will expand upon last year's target areas with new focus on liquidity controls, public pension advisors, product promotion, and exchange-traded funds (ETFs) and variable annuities.

“These new areas of focus are extremely important to investors and financial institutions across the spectrum,” SEC Chairwoman Mary Jo White said in a prepared statement. â€œThrough information sharing and conducting comprehensive examinations, [the SEC's Office of Compliance and Examinations (OCIE)] continues to promote compliance with the federal securities laws to better protect investors and our markets.”

Like last year, OCIE will target issues facing retail investors, including retirement savings, marketwide risk assessment, and the “evolving ability” to analyze data to identify and examine registrants who could be involved in illegal activity.

This year's program doesn't include examinations for the national securities exchanges, which will be conducted separately.

Here's how the new focal points merge with ongoing concerns.

Retail/Retirement Investors

  • The Retirement-Targeted Industry Reviews and Examinations (ReTIRE) initiative begun last year continues, targeting SEC-registered investment advisors and broker-dealers and the services they offer to retirement account holders. Exams will target how recommendations are made, conflicts of interest, compliance and disclosures, and how representatives in branch offices are supervised. Data analytics will play a role in identifying branch representatives who could be involved in illegal trades.
  • Public pension advisors to governments will be scrutinized for pay-to-play and other risk areas, including undisclosed gifts and entertainment.
  • Examination of fees and reverse churning will include how account recommendations are made and what fees and services are provided.
  • Variable annuities and ETFs will get new focus this year, particularly sales strategies and supervision, disclosures, and suitability. ETFs also will be examined for compliance with regulatory requirements, including the Securities Exchange Act of 1934 and the Investment Company Act of 1940.

Marketwide Risks

  • Cybersecurity compliance and controls entered the exam arena last September. This year, examiners will advance that to test how procedures and controls are working.
  • Systems Compliance and Integrity systems will be evaluated for established and enforced written policies and procedures that ensure the systems' operations and security.
  • Liquidity controls will receive new focus this year, with examiners looking at advisors to mutual funds, ETFs, and private funds that are exposed to possibly illiquid fixed-income securities.
  • Clearing agencies deemed “systemically important” based on requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act will continue to be examined annually.

Data Analytics

“In all of our 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,” the SEC states in the exam announcement.

Focus could include:

  • Advisors who already have been in trouble and their employers, anti-money-laundering programs, and problems or inconsistencies with filings of suspicious-activity reports.
  • Microcap fraud, such as pump-and-dump schemes, over-the-counter market trade compliance, and market manipulation.
  • Excessive or inappropriate trading.
  • Promotion of high-risk products and possible breach of fiduciary obligations.