The SEC Office of Compliance Inspections and Examinations recently released its 2017 Exam Priorities. This Client Alert summarizes the 2017 Exam Priorities and provides instructions on how to obtain Reed Smith's new 2017 "CCO Key Items" tool for a more in-depth discussion of key compliance topics for exam preparedness in 2017.
The SEC Office of Compliance Inspections and Examinations ("OCIE" or the "Staff") recently released its 2017 Exam Priorities. The release of the 2017 Exam Priorities provides a useful guide and reminder to registrants about their annual compliance program and risk management reviews.
Exam Priorities are always a reflection of current trends and news, highlighting practices, products and services that OCIE perceives as current risks to investors or the integrity of the U.S. capital markets. They have also come to reflect the SEC's expanded capabilities for monitoring market activity through data analytics. They are not exclusive - actual exams may, and will, cover other topics.
Below is a brief summary of each of OCIE's 2017 Exam Priorities. This year, in lieu of commentary within this Client Alert, we are making available to advisers upon request an extended checklist of "CCO Key Items" for exam preparedness in 2017. The CCO Key Items tool identifies a longer list of topics that should be on the CCO's radar, why they are hot topics, and the challenges inherent in addressing them. Advisers may request a copy of the 2017 CCO Key Items tool for exam preparedness by emailing Alexandra Poe at firstname.lastname@example.org.
The SEC has organized its 2017 Exam Priorities along three broad themes:
Protecting Retail Investors
As part of its effort to protect retail investors, OCIE will:
- Focus on registered investment advisers and broker-dealers that offer electronic investment advice through automated or digital platforms
- Expand its focus on wrap fee programs (which charge investors a single bundled fee for advisory and brokerage services) to ensure fair treatment of investors
- Continue to examine exchange-traded funds for compliance with regulatory requirements, including compliance with exemptive relief under applicable securities laws
- Expand its review of advisers that have never been examined by OCIE
- Continue to use its data analytic capabilities to identify and examine individuals with a track record of misconduct, and the investment advisers that employ them
- Continue to focus on investment advisers that provide advisory services from multiple locations
- Continue reviewing conflicts of interest and other factors that may affect registrants' recommendations to invest, or remain invested, in particular share classes of mutual funds, and assess the fairness of the formulation of investment recommendations and client portfolio management, in general
Risks Specific To Senior Investors And Retirement Investments
As part of its effort to protect senior and retirement investors, OCIE will:
- Continue its multi-year ReTIRE initiative, focusing on services offered by investment advisers and broker-dealers to retirement accounts
- Examine advisers to public pension plans to assess how they are managing conflicts of interest and fulfilling their fiduciary duty, including compliance with pay-to-play prohibitions
- Evaluate how firms utilize supervisory programs and controls to manage their interactions with senior investors, including their ability to identify financial exploitation of seniors
Assessing Market-Wide Risks
As part of its effort to maintain fair, orderly and efficient markets, and identify structural or market-wide risks, OCIE will:
- Examine money market funds for compliance with recent rule changes imposing structural and operational reforms that address redemption risks, while preserving the benefits of the funds for remaining investors. Money market funds should expect exams to focus on board oversight, stress testing and periodic reporting procedures.
- Examine select broker-dealers (such as market-makers and those that serve primarily retail customers) to assess compliance with their duty of best execution when routing customer orders for execution, including the effects of payment for order flow
- Continue annual examination of clearing agencies designated systematically important
- Enhance its oversight of FINRA, including FINRA's operations, regulatory programs and resources, and the quality of FINRA's examination program
- Continue to focus on cybersecurity compliance procedures and controls
- Continue to focus on anti-money laundering programs, including whether such programs are appropriately tailored to firm-specific risks
In addition to the three main themes described above, OCIE will focus on other exam priorities, including:
- Examinations of municipal advisors to evaluate compliance with SEC and Municipal Securities Rulemaking Board rules
- Examinations of transfer agents, including a new initiative to use transfer agent exams as a window to identify microcap issuers that may be engaging in unregistered, non-exempt securities offerings
- Examinations of private fund advisers, with a continued emphasis on conflicts of interest, disclosure of conflicts, and actions that appear to benefit the adviser at the expense of investors
We take this opportunity to remind our investment adviser clients that ADV annual updates are due within 90 days of your fiscal year end (or March 31, 2017, for most advisers), and that compliance programs must be reviewed annually and updated to reflect changes in law and regulation, as well as changes in your organization and operations.