On January 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued its exam priorities for 2020 and reiterated its focus on protecting retail investors, particularly seniors and those saving for retirement. Here are some key takeaways from the exam priorities:
OCIE will continue to focus on recommendations and advice provided to retail investors. In addition to seniors and retirement accounts, teachers and military personnel will also be a focal point for examiners, which is no surprise after we saw the SEC launch a broad investigation of compensation and sales practices in 403(b) school plans in 2019. Examinations will focus on conflicts of interest and disclosures related to fees and expenses, as well as whether firms are meeting their fiduciary duties to clients. Conflicts related to revenue sharing arrangements and other forms of direct and indirect compensation to advisory personnel for executing client transactions were specifically noted as areas of concern. RIAs can also expect OCIE to review fee billing processes as it relates to the aggregation of client accounts when calculating fee discounts, and that fee billing practices are consistent with the firm’s disclosures.
Higher risk products sold to retail investors, such as private placements, complex and high fee products, and products issued or sponsored by an affiliate, will also be scrutinized. OCIE also intends to focus on more traditional securities sold to retail investors, including mutual funds and ETFs, municipal and other fixed-income securities, and microcap securities. RIAs and broker-dealers should review any financial incentives they receive that may influence the selection of a particular mutual fund share class, as well as any mutual fund fee discounts, breakpoints and graduated fee schedules.
Standards of Care
The Interpretation Regarding Standard of Conduct for Investment Advisers has already been incorporated into the examination program for investment advisers. Broker-dealers should expect examiners to focus on the progress of implementation of Regulation Best Interest, including policies and procedures regarding conflicts disclosures. Content and delivery of the new Form CRS was also noted as a focus for both investment advisers and broker-dealers.
OCIE will continue to prioritize information security in each of its five examination programs. RIA examinations will focus on, among other things:
- Governance and risk management
- Access controls
- Data loss prevention
- Vendor management
- Incident response and resiliency
As it relates to third-party and service provider risk management, oversight practices, including those leveraging cloud-based storage, will be a particular area of focus for examiners.
Financial Technology, including Digital Assets and Electronic Advice
Firms that use alternative data and technologies as part of the investment decision-making process have been put on notice that they will be a target for examinations. As it relates to digital assets, examinations will assess: (1) investment suitability, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employees’ outside business activities. OCIE will also continue to focus on robo-advisers.
Other Priority Areas for RIAs
- RIA Compliance Programs – Examinations of dual-registrants and affiliated RIAs/BDs will be a high priority to OCIE, especially as it relates to risks associated with best execution, prohibited transactions, fiduciary advice and disclosure of conflicts related to such arrangements.
- Never Before and Not Recently-Examined RIAs – If your firm has never been examined or it has been quite some time since your last examination, 2020 may be the year it happens. Over the past five years, OCIE has continually increased its examination coverage of RIAs.
- Mutual Funds and ETFs – Mutual funds and ETFs, and the activities of their RIAs, will continue to be an exam priority for OCIE.
- RIAs to Private Funds – RIAs to private funds that have a greater impact on retail investors, such as firms that provide management to separately managed accounts side-by-side with private funds, were highlighted as a focus.
Other Priorities for Broker-Dealers
- AML programs
- Safeguarding of client funds and securities in accordance with the Customer Protection Rule and Net Capital Rule
- Trading and risk management
We encourage all SEC registrants to review the priorities release in its entirety and start preparing for Form CRS and Regulation Best Interest. CSS has built a technological solution to help firms prepare for Form CRS. To learn more about Form CRS and our solution, please click here.
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