On January 13, 2015, the staff of the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced that its examination priorities for 2015 will focus on three thematic areas: protecting retail investors; assessing market-wide risks; and the use of data analytics to identify illegal activities.
The staff noted that retail investors are being offered an increasingly complex and evolving set of investment options, including products and services that were previously considered “alternative” or “institutional.” As a result of this trend, the staff identified the following examination initiatives, among others, for 2015:
- Alternative Funds. The staff will assess funds offering alternative investments and using alternative investment strategies, including: (1) their leverage, liquidity, and valuation policies and procedures; (2) factors relevant to the adequacy of the funds’ internal controls; and (3) the manner in which such funds are marketed.
- Fixed Income Funds. The staff will continue to monitor whether funds with significant exposure to interest rate increases have implemented compliance policies and procedures and controls sufficient to ensure that fund disclosures are not misleading and are consistent with fund investment and liquidity profiles.
- Fee Selection and Reverse Churning. The staff noted that financial professionals are increasingly operating as investment advisers or as dually registered investment advisers/broker-dealers, rather than solely as broker-dealers, which often leads to a variety of available fee structures. Where an adviser has multiple fee arrangements, the staff will focus on recommendations of account types at the inception of the arrangement and thereafter, including fees charged, services provided and applicable disclosure about such relationships.
- Sales Practices. The staff will assess whether advisers are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, with a focus on those recommendations that pose greater risks and/or will result in higher fees.
The staff also announced certain market-wide risk initiatives that will examine structural risks and trends involving multiple firms or entire industries, including the following:
- Cybersecurity. The staff will continue its efforts to examine broker-dealers’ and investment advisers’ cybersecurity compliance and controls and will expand the initiative to include transfer agents.
- Large Firm Monitoring. The staff will continue to monitor the largest U.S. broker-dealers and advisers with the objective of assessing risks at individual firms and maintaining early awareness of industry-wide developments.
- Clearing Agencies. The staff will continue to employ a risk-based approach while conducting annual examinations of all clearing agencies designated systemically important. The staff noted that OCIE has made significant enhancements to its data analytic capabilities over the last few years that enable more efficient and effective analysis on firms that are potentially engaged in fraudulent and/or illegal activity.
The staff will use its data analytic capabilities for the following initiatives, among others, in 2015:
- Excessive Trading. The staff will continue to analyze data obtained from clearing brokers to identify and examine introducing brokers and registered representatives that appear to be engaged in excessive trading.
- Anti-Money Laundering. The staff will use its analytic capabilities to continue to examine clearing and introducing broker-dealers’ AML programs, focusing on firms that did not file (or filed late/incomplete) suspicious activity reports and programs that allow customers to deposit and withdraw cash and/or provide customers direct access to the markets from higher-risk jurisdictions.
In addition to the thematic areas of focus above, the staff also announced the following 2015 examination priorities:
- Never-Before Examined Investment Companies. The staff will conduct focused, risk-based examinations of registered investment companies that have not yet been examined
- Proxy Services. The staff will examine how select proxy advisory service firms make recommendations on proxy voting and how they disclose and mitigate potential conflicts of interest, as well as how investment advisers comply with their fiduciary duty in voting proxies on behalf of investors.