On January 11, 2016, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2016 examination priorities for regulated entities, including registered funds and investment advisers. The examination priorities are organized into the same three broad categories as last year: (1) matters of importance to retail investors, including investors saving for retirement; (2) issues related to market- wide risks; and (3) use of data analytics to identify potential illegal activities. Within these groupings are several issues of potential interest to registered funds and their investment advisers, including the following:
ETFs: OCIE will 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 the ETFs’ unit creation and redemption process. OCIE also stated its intent to evaluate ETF sales strategies, trading practices, and disclosures, including “excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs.”
Cybersecurity: Noting its recent initiatives to examine cybersecurity compliance and controls, OCIE will continue these efforts by testing and assessing firms’ implementation of cybersecurity procedures and controls. Throughout the past year, the SEC has devoted a significant amount of attention to identifying risks in the area of cybersecurity, including releasing cybersecurity guidance and publishing summary observations of findings from a series of cybersecurity examinations.
Liquidity Controls: In light of changes in fixed income markets over the past several years, OCIE will examine investment advisers to mutual funds, ETFs and private funds that have exposure to potentially illiquid fixed income securities and evaluate, among other things, risk management, valuation, liquidity management and trading activity.
Never-Before-Examined Investment Advisers and Investment Companies: OCIE will continue conducting “focused, risk-based examinations” of investment advisers and fund complexes that have not yet been examined.
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: