The Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) published its 2020 Examination Priorities, an annual publication that enhances transparency and provides insights into upcoming compliance and enforcement activities affecting investment advisers. These include both existing and emerging areas of risk that the regulator expects investment advisers to identify and mitigate.
As the securities markets evolve, OCIE revises and updates its examination priorities each year with a strategic focus. The current examination priorities most relevant to investment advisers and, in particular, private fund advisers are set forth below.
- Retail Investors, Including Seniors and Those Saving for Retirement. Retail investors were identified as an area of focus in 2019, but OCIE is placing new emphasis on seniors and persons saving for retirement. OCIE will prioritize the examination of intermediaries such as investment advisers, broker-dealers and dually registered firms that serve retail investors, with particular focus on those that target retirement communities as well as teachers and military personnel. OCIE will also focus on higher-risk products that are complex, have high fees and are recommended by an investment adviser that has a conflict of interest involving the issuer of the security. OCIE will also continue its focus on investment advisers to private funds that have a greater impact on retail investors, such as firms that provide separately managed accounts that invest side by side with private funds.
- Information Security. OCIE is establishing a narrower focus on cybersecurity this year, identifying information security risks as a priority. Specific compliance areas include governance and risk management, access controls, data loss prevention, vendor management, training and incident response, and resiliency. With respect to vendor risk management, OCIE indicated that it will focus on network solutions, including those leveraging cloud-based storage.
- Focus on Conflicts of Interest. Risk-based examinations will continue for investment advisers that have never been examined. In addition, the examinations of investment advisers will focus on whether they have satisfied their fiduciary duties, including the duty of care and loyalty and whether they have provided advice that is in the best interests of their clients. OCIE also will continue its focus on whether an investment adviser has either eliminated or at least provided disclosure of all conflicts of interests associated with the investment adviser’s business. In this regard, risks and conflicts associated with fee and expense allocations and undisclosed or inadequately disclosed compensation arrangements will be scrutinized. Further, OCIE indicated that in connection with the examination of investment advisers to private funds, OCIE will assess compliance risks related to matters such as the misuse of material and nonpublic information and the use of affiliates of the investment adviser to provide services to clients.
- Anti-Money Laundering (AML) Programs. As part of this new priority, OCIE will review whether advisers are in compliance with applicable AML requirements. OCIE found that AML programs must be reasonably designed to identify and verify the identity of customers (or beneficial owners), perform due diligence, monitor for suspicious activity, and file suspicious activity reports as appropriate.
- Financial Technology (Fintech) and Innovation, Including Digital Assets and Electronic Investment Advice. Given the growth in the digital assets market, OCIE will continue its focus on investment advisers engaged in this space. With respect to investment advisers conducting digital asset strategies, OCIE will focus on investment suitability, trading practices, safety of client funds, pricing and valuation, effectiveness of compliance programs, and supervision of employee outside activities. OCIE indicated that it will also focus on investment advisers that provide services to clients through automated platforms (i.e., commonly referred to as “robo-advisers”).
OCIE cautioned that this priorities list is not exhaustive, even though it will drive its examinations in the coming year. Investment advisers should review their operations and policies based on this list to ensure processes are in place to ensure compliance. Although certain items in the enforcement priorities appear to be recurring, the added focus on seniors as a specific category of retail investors, and the focus on complex financial products, could require a closer look at any relevant policies and procedures.