On February 7, 2018, the SEC released its annual examination priorities. Many of the themes from 2017 remain on the priorities list. However, there are several new areas of concerns that the SEC has highlighted as priorities for the coming examination year.
As important as the actual priorities that have been highlighted by the SEC, so are the underlying principles that drive the priorities. Firms need to keep in mind that the SEC examination program is risk driven. The SEC uses a risk-based strategy to effectively oversee market participants. And as the SEC has become more risk driven, it has also required the firms that it oversees to become more risk driven in how they oversee the compliance risks to their firm operations. For some firms, the risks can be very clear cut and apparent. But for most, a risk-based approach to compliance requires that firms, especially their legal counsel and compliance staff, adopt a risk-based approach to how they assess risk, oversee risk and comply with the securities laws. And sometimes compliance risks can emanate from unexpected areas of the firm. As a result, the risks may then reverberate across the firm, resulting in increased compliance risk, as well as magnified legal and financial risk to the firm.
Top themes for the SEC’s examination program this year are:
Cybersecurity: The SEC will continue to prioritize cybersecurity in each of their
examination programs. Examinations will focus on governance and risk assessment,
access rights and controls, data loss prevention, vendor management, training and
Anti-Money Laundering: Examinations will continue to focus on examining whether
entities are appropriately adapting AML programs to address their obligations. Reviews
will cover the customer due diligence requirement, as well as whether entities are filing
timely, complete and accurate SARs and conducting robust and timely independent tests
of their AML programs.
Disclosure of the Costs of Investing: The SEC concern here is proper disclosure and
calculation of fees, expenses and other charges that investors pay. Examiners will be
focusing on whether fees and expense are calculated and charged in accordance with
disclosures provided to investors.
Electronic Investment Advice: This was a high priority issue for the SEC in its 2017
priorities and was heightened by the Robo-Advisers guidance disseminated in February
2017. It is highly likely that the SEC will continue to gather critical information regarding advisers’ advice programs and how they surveil their programs for compliance with the securities laws.
Wrap Fee Programs: The SEC will review whether investment advisers are acting in a
manner consistent with their fiduciary duty and whether they are meeting their
contractual obligations to clients. Focus areas will include whether 1) recommendations
to invest in a wrap fee program and to continue in the program are reasonable; 2)
conflicts of interest are disclosed in compliance with applicable regulatory requirements;
and 3) investment advisers are obtaining best execution and disclosing costs associated
with executing trades through another broker-dealer.
Never-Before- Examined Investment Advisers: The SEC will continue to make risk-
based assessments and select those investment advisers for examination that have
elevated risk profiles.
Senior Investors and Retirement Accounts and Products: Regulatory focus will remain on investment advisers and broker-dealers that offer services and products to investors with retirement accounts. Examinations will focus on investment recommendations, variable insurance products, and sales and management of target date funds.
Mutual Funds and Exchange Traded Funds (ETFs): The SEC will focus on mutual funds that have 1) experienced poor performance or liquidity in terms of their subscriptions and redemptions relative to their peer group; 2) are managed by advisers with little experience managing registered investment companies; or 3) hold securities which are potentially difficult to value during times of market stress. The agency will focus on both ETFs and mutual funds that seek to track custom built indexes to review for any conflicts the adviser may have with the index provider and the adviser’s role with respect to the selection and weighting of index components.
Municipal Advisors and Underwriters: The SEC will continue to examine municipal
advisers to evaluate their compliance with registration, recordkeeping, and supervision
requirements. Examinations will also focus on compliance with MSRB rules regarding
professional qualification requirements, continuing education requirements, and core
standards of conduct and duties of municipal advisers when engaging in municipal
Fixed Income Order Execution: Examination staff will seek to conduct examinations to assess whether broker-dealers have implemented best execution policies and procedures, consistent with regulatory requirements, for both municipal bond and corporate bond transactions.
Cryptocurrency, Initial Coin Offerings (ICOs), Secondary Market Trading and
Blockchain: The SEC will continue to monitor the sale of these products, and where the
products are securities, examine for regulatory compliance. Areas of focus will include
1) whether finance professionals maintain adequate controls and safeguards to protect
these assets from theft or misappropriation, and whether finance professionals are providing investors with disclosure about the risks associated with these investments,
including the risk of investment losses, liquidity risks, price volatility and potential fraud.
As a seasoned veteran attorney of both the Federal Reserve Board’s Office of Bank Supervision(Risk), focusing on securities activities in banks, and the SEC’s Office of Compliance Inspections and Examinations, I have conducted numerous SRO, adviser, brokerage, fund company and municipal dealer examinations. As such, I am uniquely qualified to assist you in ensuring that your compliance program meets SEC requirements. Moreover, I can also assist your firm in developing compliance policies and procedures, critical routine testing of internal controls, as well as mock examination preparation for anticipated SEC, FINRA and other regulatory examinations.’
The dissemination of the SEC’s 2018 Examination Priorities makes this an appropriate time to review your current compliance policies and procedures, conduct critical testing to identify material gaps, as well as prepare for anticipated examinations by performing mock examinations.
For assistance with compliance program needs, I can be reached at 410-733- 5325 or at