Standing by its commitment to provide transparency and share information with industry registrants; the SEC has released 2016 examination priorities from OCIE, Office of Compliance Inspections and Examinations.
According to Marc Wyatt, OCIE Director, “We hope that registrants will use this information to [evaluate] their own compliance programs.”
New areas this year they will focus on include
Additionally, protecting investors and analyzing risk management in the areas below will continue to be examined
On a broader scope across various types of industry business models such as; investment companies, broker-dealers, transfer agents, clearing agencies, and exchanges, areas of focus include:
- Protecting Retail Investors and Investors Saving for Retirement
- Growing numbers of investors face a greater dependence on their own savings for retirement. The initiative to protect investors includes focus on basis for recommended investments, conflicts of interest, and marketing disclosure.
- Assessing Market-Wide Risks
- Maintaining orderly and efficient markets is at the core of the SEC’s mission. Examinations will include a look into structural risks and trends, over multiple firms or entire industries.
- Using Data Analytics to Identify Signals of Potential Illegal Activity
- Always striving to detect risk, the OCIE mines data intelligence from examinations and regulatory filings. Algorithms, data analysis, and review are leveraged to identify registrants and areas with elevated risk profiles.
Never-Before-Examined Investment Advisors and Investment Companies
- April 2015 OCIE expanded on its previously announced priority to focus on risk-based examinations of investment companies that have not previously been examined. The risk assessment focused exams of firms selected include a look at compliance programs, investment advisory contracts, distribution of fund shares, portfolio asset valuations, use of derivatives. Read more about the N-B-E initiative…
A closer look into OCIE areas of focus for 2016 examinations
New areas of OCIE examinations focus for 2016
- Liquidity controls
- September 22 2015 SEC voted to propose rule 22e-4, in order to improve liquidity risk management of open-end funds such as exchange-traded funds (EFTs) and mutual funds. The key feature of open-end funds is that they allow investors to redeem their shares daily. Thus, the funds must maintain liquid assets in order to meet shareholder redemptions. 2016 examination priorities will include a look at potentially illiquid securities and various controls in place to manage risk, valuation, liquidity, trading, and capital.
- Public pension advisors
- Pay-to-play rule 206(4)-5 was adopted June 2010 to address the inherent issues related to the power public officials have in appointing an investment advisory firm to manage public pensions. The rule limits political contributions by investment advisors and other collusive activities like entertainment and travel. 2016 examinations will continue to focus on identification of undisclosed gifts.
- Product promotion
- Existing and emerging investment products can be complex and high risk. For 2016, the OCIE asserts its commitment to protecting investors from sales practices that result in a breach of fiduciary responsibility or unsuitable investments.
- Exchange-traded funds
- Sales strategies, trading practices, and disclosures for EFTs all have the potential to influence buy-sell practices. 2016 examinations will look for excessive portfolio concentration, market trading risks, risk disclosure, and suitability. A particular focus will be placed on niche or leveraged/inverse ETFs (Leveraged EFTs meaning those constructed with various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark)
- Variable annuities
- Variable annuities pay out based on the performance of the underlying equity securities, making risk management of the portfolio an important factor. With more and more Americans including variable annuities in their retirement plans, the OCIE is committed to examination of adequate disclosure and supervision of these accounts.
On-going risks of firms, investors, and the industry to be examined
- Cyber-Security is an ever evolving threat throughout the financial industry with banks and investment firms a high value target for thieves, hackers, and activists. September 2015 the OCIE announced a 2nd examination sweep indicating the examination will be more focused on firms implementation of systems outlined in policies or recommended guidelines. The key message is “preparedness”, where the examination includes a look into; governance, risk assessment, vendor management, training, incident response management.
- Microcap Fraud
- July 2015 the SEC charged 34 defendants (15 individuals, 19 firms) with microcap market manipulation schemes and sought return of civil damages, return of gains, and barring from membership. Pump-and-dump schemes and market manipulation is always a high value target of OCIE examinations. Broker-dealer and transfer agent operations will be assessed for compliance with securities law quotes and trading on over-the-counter markets.
- Fee Selection / Reverse Churning
- Dually registered broker-dealer / investment advisors offering investors a variety of fee arrangements are shown to be susceptible of making recommendations based on their own interests rather than the investors. 2016 OCIE examinations will take a look into fees charged, services provided, and disclosures.