On January 11, 2016 the Office of Compliance Inspections and Examinations (the “OCIE”) for the Securities and Exchange Commission (the “SEC”) announced its key areas of focus with respect to examinations in 2016. Like last year, the OCIE’s priorities are organized into three categories; (i) risks facing retail investors, (ii) assessing issues related to market-wide risks and (iii) new and evolving technology that will allow the OCIE to evaluate larger amounts of data to identify registrants who are participating in illegal activity.
Risks Facing Retail Investors
Protecting retail investors and retirement savers remains important to the OCIE this year and for the foreseeable future. As investors take more control over their own investments, including those made into retirement plans, the OCIE will begin conducting new examination initiatives in order to assess and protect investors from new risks emerging in the field. The OCIE will continue its multi-year examination, ReTIRE, which examines the reasonable basis for recommendations made to investors, conflicts of interest, compliance controls and marketing and disclosure practices of SEC-registered investment advisors and broker-dealers. The OCIE will focus efforts on ETF compliance with the Securities Exchange Act of 1934 and Investment Company Act of 1940 including looking into sales strategies, trading and disclosure practices. Another area of focus this year relates to fee selection and reverse churning. Finally, the OCIE will look to identify risks specific to variable annuities and public pension plans.
Assessing Market-Wide Risks
In 2016, the OCIE will focus on the following market-wide risks: (i) cybersecurity, (ii) liquidity controls and (iii) clearing agencies. Given the changes in fixed income markets in recent years, the OCIE will examine advisers to funds that have exposure to potentially illiquid fixed income securities.
Using Data Analytics to Identify Potential Illegal Activity
The SEC will continue to evolve its technology in order identify potential illegal activity. The OCIE will identify individuals with a track record for misconduct and examine the firms that employ them. Further, the OCIE will continue to monitor AML programs, microcap fraud and excessive trading.
Other Initiatives/Hedge Fund Review
Formed in 2014, the SEC created the Private Funds Unit (the “PFU”) to address concerns and issues that arose during their review of private equity funds. In doing so, the SEC has brought multiple enforcement actions against private equity funds in the last few years. The SEC has announced a similar review for hedge funds, leaving many to believe that the PFU will conduct similar investigations into hedge funds, resulting in a greater number of enforcement actions. In a speech in November of 2015, Andrew Rozenblit of the OCIE stated that the new sweep would be based upon his working “thesis” that hedge fund managers might be involved in activities or practices that merit sanctions. Hedge fund managers should anticipate that the upcoming reviews by the SEC will have a stronger focus on issues such as conflicts of interest, appropriate performance reporting, and valuation.