On January 12, 2017, the SEC announced its Office of Compliance Inspections and Examinations (OCIE) priorities for 2017. The OCIE examines and reviews a wide variety of financial institutions, including investment advisors, investment companies, broker-dealers, transfer agents, clearing agencies and national securities exchanges. The OCIE examination goals are to promote compliance, prevent fraud, identify risk and inform policy.
The priorities this year have a primary focus on (i) protecting retail investors, especially those saving for retirement; (ii) assessing market-wide risks; and (iii) new forms of technology, including automated investments advice.
The SEC shares its annual examination priorities as a heads-up and to encourage industry participants to conduct independent reviews and make efforts for increased compliance, prior to an SEC examination, investigation or potential enforcement proceeding. Moreover, the SEC chooses its priority list in conjunction with discussions with all divisions of the SEC and other market regulators and identifies what it believes are the areas that present heightened risk to investors and market integrity.
A. Retail Investors
Retail investors are being offered products and services that were formally only available to institutional investors. A wide range of products that have traditionally been alternative or institutional products, such as private funds, illiquid investments and structured products, are now available to the retail investor. In addition, as investors are more dependent than ever on their own investments for retirement, financial services firms have increased their services in the area of planning for retirement and the SEC intends to examine this area of service. The SEC will examine whether information, advice, products and services are being offered in a manner consistent with laws, rules and regulations.
The focus of examinations in this area will be on:
Electronic Investment Advice – Investors are increasingly able to obtain investment advice through automated or digital platforms. The SEC will examine registered investment advisors (RIA’s) and broker-dealers that offer these services, including “robo-advisors” that offer advice online or through other electronic platforms. The SEC will focus on the firms’ compliance programs, marketing, formulation of investment recommendations, data protection, and conflict of interest disclosures.
Wrap Fee Programs – The SEC will expand its review of RIA’s and broker-dealers that offer a single bundled fee for advisory and brokerage services, usually referred to as a “wrap fee program.” In particular, the SEC will review whether the RIA’s are meeting their fiduciary duties and contractual obligations to the clients. Areas of concern are wrap account suitability, effectiveness of disclosures, conflicts of interest, and brokerage practices, including best execution and trading away.
Exchange Traded Funds (“ETF’s”) – The SEC will examine ETF’s for compliance with securities laws, including exemptions under the Exchange Act of 1934 and Investment Company Act of 1940. The SEC will also focus on unit creation, redemption process, sales practices and disclosures and the suitability of broker-dealers’ recommendations to purchase ETF’s with a niche strategy.
Never-before-examined Investment Advisors – The SEC will expand its review of never-before-examined investment advisors and will, in particular, try to examine more newly registered advisors and advisors that have been registered for a long period of time without examination.
Recidivist Representatives and their Employers – The SEC will use analytics to track individuals with a history of misconduct and will also examine the firms that employ these people.
Multi-branch Advisors – The use of a multi-branch model provides unique challenges in fashioning compliance programs and oversight procedures.
Share Class Selection – The SEC will examine factors affecting recommendations to invest in or remain invested in a particular share class of a mutual fund, including conflict-of-interest issues. The SEC will examine whether recommendations are being improperly made for share classes with higher loads or distribution fees.
B. Focusing on Senior Investors and Retirement Investments
The SEC continues to focus on retirement accounts and senior investors. Specific areas of priority include:
ReTIRE – The SEC will continue to focus on its ReTIRE initiative, which focuses on investment advisors and broker-dealers that offer services to retirement accounts. The priority this year is on recommendations and sales of variable insurance products and the sales and management of target date funds.
Public Pension Advisors – The OCIE will examine investment advisors to state pension plans, municipalities and other government entities, including particular risks to these advisors such as pay to play and undisclosed gifts and entertainment practices.
Senior Investors – The OCIE will evaluate how firms manage interactions with senior investors, including the ability to identify financial exploitation. Examinations will focus on supervisory programs and controls related to products and services directed at senior investors.
C. Assessing Market-wide Risks
The SEC continues to review structural risks and trends that involve multiple firms and industries, including:
Money Market Funds – The SEC will review money market funds to ensure compliance with the new redemption rules and changes to Form PF which came into effect in October 2016.
Payment for Order Flow – The SEC will examine broker-dealers with a retail client base to ensure compliance with the duty of best execution when routing customer orders.
Clearing Agencies – The SEC will continue annual clearing agency reviews.
FINRA – The SEC intends to enhance its oversight of FINRA with respect to its goal of protecting investors and market integrity. The SEC will also review the quality of FINRA’s examination of broker-dealers.
Regulation Systems Compliance and Integrity (SCI) – The SEC will continue to review compliance with Regulation SCI. See my blog HERE.
Cybersecurity – The SEC will review cybersecurity compliance procedures and controls. See my blog HERE.
Anti-Money Laundering (“AML”) – The SEC will examine clearing and introducing firms’ AML programs and specifically those of firms that have not filed suspicious activity reports or have filed such reports late. The SEC will also examine programs that allow customers to deposit and withdraw cash and/or provide non-U.S. customers with direct access to the markets.
D. Other Areas of Examination
In addition to the primary focus discussed above, the SEC will prioritize the following additional areas for examination:
Transfer Agents – The SEC views transfer agents as an important gatekeeper to prevent Section 5 and other violations as well as preventing fraud. The SEC intends to allocate more resources to examine transfer agents and particularly those involved with microcap securities and private offerings.
Municipal Advisors – The SEC will conduct examinations of newly registered municipal advisors.
Private Fund Advisors – The SEC will examine private fund advisors, focusing on conflicts of interest and disclosure of conflicts.
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Contact Legal & Compliance LLC. Technical inquiries are always encouraged.
Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.
© Legal & Compliance, LLC 2017