On January 13, 2015, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2015 examination priorities for investment advisers, broker-dealers and transfer agents. These priorities emphasize the importance of transparency and seek to identify, through enhancements in technology, potential illegal activity by focusing on the following key areas.
Protecting Retail Investors and Investors Saving for Retirement
OCIE noted that retail investors are more dependent than ever on their own investments for retirement and are increasingly facing new and complex options for investing. Products and services formerly identified as alternative or institutional like private funds, illiquid investments and structural products are increasingly being developed for retail investors. As a result, in 2015 OCIE plans several initiatives to assess the risks of these trends to retail investors, which emphasize transparency and suitability concerns. These include targeting (a) the adequacy of fee arrangements by investment advisers; (b) firms’ sales practices when making investment recommendations; (c) the suitability of recommendations; and (d) the supervision of registered representatives and financial advisors in branch offices.
OCIE also highlighted the rapid growth of alternative investments companies and committed to continued assessment of these funds. Additionally, OCIE expects that interest rates will rise in the near future and thus anticipates reviewing mutual funds with significant exposure to interest rate increases to ensure the adequate implementation of compliance policies and procedures and investment and trading controls to make sure that these mutual funds’ disclosures are not misleading.
Identifying Signals of Potential Illegal Activity
OCIE has, over the last few years, made significant enhancements to its data analytics that allow it to more efficiently and effectively analyze data to which it has access. With these tools and advances, OCIE plans to focus on firms that appear to be engaged in potentially fraudulent or other illegal activity, with an emphasis on identifying and then examining the following:
- Registered representatives with a track record of misconduct and the firms that employ them.
- Firms and registered representatives that appear to be engaged in or that appear to aid and abet pump-and-dump schemes or other market manipulation schemes.
- Brokers and/or registered representatives that appear to be engaged in excessive trading.
Last, OCIE stated that it will continue to focus on and examine firms’ AML programs by zeroing in on firms that are not filing suspicious activity reports (“SARs”), file incomplete SARs or file late SARs.
Other Areas and Initiatives
In addition to these two key areas, OCIE also plans to examine for structural risks and trends involving multiple firms or entire industries in 2015. OCIE intends to focus on large firm monitoring and to complete examinations for all clearing agencies designated systematically important. Further, OCIE plans to continue its cybersecurity initiative which focuses on broker-dealers and investment advisers’ cybersecurity compliance controls. OCIE will also continue to examine newly-registered municipal advisers and a risk-based selection of investment companies that have never been examined and, as noted in prior posts here and here, given the concerns the SEC has recently expressed concerning private equity funds, OCIE will continue to conduct examinations in this space.