The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently announced their 2015 exam priorities for their respective examination programs. Both the SEC and FINRA have prioritized review of certain investment-related issues affecting the growing senior population. This regulatory focus echoes increasing national concern about the financial security of the retirement-aged baby boomer generation. It means continued attention to issues affecting senior investors, including suitability matters and broker communications with seniors. Both regulators also plan to focus much of their attention on the municipal securities market, a sector that has seen a robust uptick in regulatory and enforcement activity over the past year. Broker-dealers, investment advisers and other market participants should take notice of these 2015 exam priorities and undertake a comprehensive review of their current internal controls and practices for these core areas of regulatory focus.
SEC Exam Priorities
On January 13, 2015, the SEC announced the exam priorities for its Office of Compliance Inspections and Examinations (OCIE), focusing on three particular areas: protecting retail investors, assessing market-wide risks and using data analytics to identify signs of potential illegal activity.
The SEC noted that registrants have been developing and offering to retail investors a variety of new services and products formerly marketed as alternative or institutional investment products. In addition, investors are increasingly dependent on their own investments for retirement, causing the financial services industry to offer a wide array of information, advice, products and services to retail investors planning for retirement years. As a result, the SEC examination initiatives within the retail investor and retirement space will target risks arising from fee selection and reverse churning, sales practices, suitability, branch office noncompliance, alternative investment companies and fixed income investment companies.
The SEC also explained that it aims to maintain fair, orderly and efficient markets and to examine for structural risks and trends involving multiple firms or entire industries. To that end, the SEC plans to monitor large firms and clearing agencies, examine investment advisers’ cybersecurity compliance and controls, and assess potential equity order routing conflicts. The SEC also intends to utilize data analytics in order to target recidivist brokers, microcap fraud, excessive trading and anti-money laundering (AML). The SEC identified several other initiatives for the coming year, including examinations of municipal advisers and proxy advisory services, never-before-examined investment companies, private equity firms and transfer agents.
FINRA Exam Priorities
On January 6, 2015, FINRA announced its examination priorities for 2015, focusing on broker-dealer sales practices, financial and operational priorities, and market integrity matters.
Specifically, within the sales practice area, FINRA will focus on how firms are marketing interest rate-sensitive fixed income securities, variable annuities, alternative mutual funds, non-traded REITs and ETNs that track alternatively weighted indices. FINRA will also pursue inquiries into firm compliance with the new supervision rules (FINRA Rules 3110, 3120, 3150 and 3170), which became effective on December 1, 2014, as well as the handling of IRA rollovers, excessive trading and marketing of private placement investments.
In addition, FINRA plans to devote attention to high-risk and recidivist brokers, sales charge discounts and waivers, AML efforts, and newly registered municipal advisers.
FINRA took this occasion to highlight its concerns about a growing number of situations in which firms have repeatedly failed to provide timely responses to information requests made in connection with examinations and investigations. FINRA warned its member firms that failing to fully and timely respond to such information requests exposes firms to disciplinary action. Another critical issue that FINRA designated as a priority is to ensure that registered individuals make required disclosures on their Form U-4s, and that broker dealers have supervision systems in place to monitor this pursuant to amended Rule 3110. Disclosure of liens, bankruptcies, judgments and convictions has become an important enforcement area, and now member firms have to do more due diligence in onboarding and the annual compliance review so that firms are taking responsibility for the full disclosure, not just relying on their employees.
The SEC’s 2015 examination priority list can be found here.
FINRA’s 2015 examination priority list can be found here.