The Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) has announced its examination priorities for 2019, identifying important topics that OCIE will focus on in the coming year. While 2019’s main categories are largely the same as 2018 (retail investors, compliance and risks in critical market infrastructure, cybersecurity, AML programs), 2019 highlights “digital assets” as a main topic heading (up from its former place as a sub-topic in 2018).
The examination program continues to grow each year. In 2018, OCIE’s National Exam Program completed over 3,150 examinations – a 10% increase over 2017, with the largest increase occurring in the number of investment company examinations (up by 45%).
Below is a chart comparing the topics from OCIE’s 2017, 2018 and 2019 Priorities. After the chart, we have summarized the 2019 priority topics.
Retail Investors: OCIE will continue to prioritize the protection of senior investors and those saving for retirement, with a particular focus on how firms supervise those accounts. In addition, OCIE will prioritize the examination of firm disclosures of fees, expenses and conflicts of interest. In the context of investment advisors, OCIE will focus on the suitability of recommendations, including whether recommended strategies are appropriately monitored for changes in risk. New investment advisors and those that have not recently been examined will be examination priorities, as will municipal advisors and broker-dealers that are subject to the Customer Protection Rule (Exch. Act. Rule 15c3-3). Mutual funds, exchange traded funds and microcap securities continue to be areas of heightened focus for examiners.
Compliance and Risk in Registrants Responsible for Critical Market Infrastructure: Priorities include clearing agencies, particularly those designation as systemically important under the FSOC; entities subject to Regulation System Compliance and Integrity; transfer agents, including those developing blockchain technology; and National Securities Exchanges.
FINRA and MSRB: Examinations of FINRA will continue to focus on Operations and Regulatory Programs and the quality of FINRA’s examinations of broker-dealers and broker-dealer-registered municipal advisors. For the MSRB, OCIE will continue to evaluate the effectiveness of MSRB policies, procedures and controls.
Digital Assets: OCIE will conduct high-level inquiries to determine the scope and extent of market participants engaging in digital assets, and for firms actively engaged in the digital asset market, will conduct exams focused on portfolio management, trading, safety of client assets, pricing, compliance and internal controls.
Cybersecurity: Examinations will focus on the proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. For investment advisors in particular, OCIE will focus on recently-merged firms and those with multiple branch offices.
Anti-Money Laundering Programs: Compliance with AML obligations continues to be a priority for OCIE, and 2019 highlights SAR filings, implementation of AML programs, and robust and timely AML testing.
A copy of the Priorities is available here.