On January 13, 2015, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (the “SEC”) released its 2015 examination priorities. The SEC identified three thematic issues: (i) matters relating to retail investors and investors saving for retirement, (ii) issues related to market-wide risks and (iii) analysis of data to identify and examine registrants that may be engaged in illegal activity.
Protecting Retail Investors and Investors Saving for Retirement
The SEC stated that it would review whether an investment adviser’s recommendations for a retail investor are “in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships” in the context where an investment adviser offers a variety of fee arrangements. The SEC will assess whether registrants are using improper or misleading sales practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, particularly when greater risks and/or higher fees are involved. The SEC will also evaluate recommendations to invest retirement assets into complex or structured products, including the suitability of such recommendations. Another issued identified by the SEC includes the supervision of representatives of an investment adviser in branch offices, including whether the branch offices are deviating from the compliance practices of their home office. Lastly, the SEC identified (A) “alternative” investment strategies, “with a particular focus on: (i) leverage, liquidity and valuation policies and practices; (ii) factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel and back-offices; and (iii) the manner in which such funds are marketed to investors” and (B) fixed income investment companies (including whether compliance policies and procedures and investments and trading controls were sufficient to ensure that the funds’ disclosures are not misleading) as examination priorities.
Assessing Market-Wide Risks
The SEC will focus on the following initiatives with respect to assessing market-wide risk: (i) monitoring the largest U.S. broker-dealers and asset managers to assess risk at individual firms and maintain early awareness of developments industry-wide; (ii) examinations of clearing agencies designated systemically important; (iii) examination of broker-dealers’ and investment advisers’ cybersecurity compliance and controls; and (iv) assessment of whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.
Using Data Analytics to Identify Signals of Potential Illegal Activity
The OCIE stated that it has made “significant enhancements in data analytics that enable [OCIE] to efficiently and effectively analyze the data to which [the OCIE has] access.” OCIE stated that it will use its “analytic capabilities to identify individuals with a track record of misconduct and examine the firms that employ them.” The OCIE also identified microcap fraud, excessive trading and anti-money laundering issues as focus areas.
The OCIE concluded by stating that it will allocate examination resources to (i) municipal advisors, (ii) proxy advisory service firms, (iii) never-before-examined investment companies, (iv) fees and expenses in private equity and (v) transfer agents.