The Securities and Exchange Commission (SEC), through its Office of Compliance Inspections and Examinations (OCIE), has published its exam priorities for 2016. According to the SEC, these priorities reflect certain practices and products that may present heightened risk to investors and/or the integrity of the U.S. capital markets.
The priorities include three broad categories: Retail Investors, Market-Wide Risks, and Data Analytics. Several items of particular interest to Registered Investment Advisers are noted below.
The Retail Investor category focuses on services to investors with retirement accounts, ETFs (particularly leveraged ETFs), fee arrangements offered by dually-registered investment adviser/broker-dealers and disclosure and suitability issues around variable annuities.
In the area of Market-Wide Risks, the SEC will continue to focus on cybersecurity, having launched their second initiative to examine broker-dealers’ and investment advisers’ cybersecurity compliance and controls last September. These efforts will include testing and assessing the implementation of procedures and controls.
The SEC will also use Data Analytics to, among other things, identify individuals with a track record of misconduct and examine the firms that employ them; to analyze data to identify and examine firms and their registered representatives that appear to be engaged in excessive or inappropriate trading; and to detect the promotion of new, complex, and high risk products and identify potential suitability issues and/or breaches of fiduciary obligations.
Finally, the SEC will examine private fund advisers, focusing on fees and expenses and evaluating the controls and disclosure associated with side-by-side management of performance-based and purely asset-based fee accounts. It will continue to conduct focused, risk-based examinations of selected registered investment advisers that it has not yet examined.
A link to the OCIE’s Examination Priorities for 2016 is here.