On January 12, 2017, the SEC's Office of Compliance Inspections and Examinations (OCIE) announced its 2017 examination priorities for regulated entities, including funds and investment advisers. The examination priorities are organized into three broad categories: (1) matters of importance to retail investors; (2) risks specific to senior investors and retirement investments; and (3) issues related to market-wide risks. Within these groupings are several issues of potential interest to funds and their investment advisers, including the following:
ETFs: OCIE will continue to examine ETFs for compliance with applicable exemptive relief granted under the Exchange Act and the 1940 Act and with other regulatory requirements, as well as review ETFs' unit creation and redemption processes. OCIE will also focus on sales practices and disclosures involving ETFs and the suitability of broker-dealers' recommendations to purchase ETFs with niche strategies.
Money Market Funds: OCIE will examine money market funds for compliance with the amendments to Rule 2a-7 under the 1940 Act that became effective in October 2016. OCIE stated that examinations will "likely include assessments of the boards' oversight of the funds' compliance with these new amendments as well as review of compliance policies and procedures relating to stress testing and funds' periodic reporting of information to the [SEC]."
Cybersecurity: OCIE will continue its initiative to examine cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls.
Share Class Selection: OCIE will continue reviewing conflicts of interest and other factors that may affect firms' recommendations to invest, or remain invested, in particular share classes of mutual funds.
Electronic Investment Advice: Noting that investors are increasingly able to obtain investment advice through automated or digital platforms, OCIE stated that it will examine investment advisers and broker-dealers that offer such services, including "robo-advisers" that interact with clients primarily online and firms that use automated platforms for a portion of their services. Examinations will likely focus on "compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures relating to conflicts of interest." OCIE will also review firms' compliance practices for overseeing algorithms that generate recommendations.
Wrap Fee Programs: OCIE will expand its focus on investment advisers and broker-dealers associated with wrap fee programs. Examinations will likely focus on "whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients." Other areas of particular focus will be wrap account suitability, effectiveness of disclosures, conflicts of interest and brokerage practices, including best execution and trading away.
Never-Before-Examined Investment Advisers: OCIE stated that it will expand its "Never-Before Examined Adviser" initiative to include "focused, risk-based examinations" of newly registered investment advisers as well as of selected investment advisers that have been registered for a longer period but have never been examined.
Payment Order Flow: OCIE will examine select broker-dealers (e.g., market-makers and those that serve primarily retail customers) to assess compliance with duties of best execution when routing customer orders.
FINRA: OCIE will enhance its oversight of FINRA and, in addition to its inspections of FINRA's operations and regulatory programs, will focus on assessing the quality of FINRA's examinations of individual broker-dealers.
This list of examination priorities is not exhaustive and OCIE may adjust the priorities in light of market conditions, industry developments and ongoing risk assessment activities.
The examination priorities are available at: https://www.sec.gov/about/offices/ocie/national-examination-programpriorities-2017.pdf.