SEC Sets Sights on ‘Never-Before and Not-Recently Examined’ RIAs

RIAs that have never been examined and those that have not been examined for several years will be of particular interest to the Securities and Exchange Commission in 2020. 

In the newly released 2020 exam priorities of the SEC's Office of Compliance Inspections and Examinations (OCIE), the SEC explains that these examinations will include RIAs advising retail investors as well as private funds and will focus on whether the RIAs’ compliance programs have been appropriately adapted in light of any substantial growth or change in their business models.

“As markets evolve, so do risks and potential harm to investors. OCIE continually works to adjust its examination focus areas to target these risks and publishes its annual priorities to communicate where we see the potential for increased risk and related harm,” notes OCIE Director Pete Driscoll. “We hope that this transparency helps firms evaluate and improve their compliance programs, which ultimately helps protect investors.” 

As such, the report says, the OCIE will again emphasize the protection of retail investors, especially seniors and those saving for retirement. Examinations in these areas will include reviews of disclosures relating to fees, expenses and conflicts of interest.

Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs and the oversight practices of their boards of directors. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent Regulation Best Interest rulemaking, along with trading practices. 

Reg BI Implementation 

To further assist broker-dealers before the June 30, 2020 compliance date for Reg BI and Form CRS, OCIE plans to engage with broker-dealers during examinations on their progress on implementing the new rules and questions they may have. 

After the compliance dates, OCIE says that it intends to assess implementation of the requirements, including policies and procedures regarding disclosures of conflicts, and for both broker-dealers and RIAs, the content and delivery of Form CRS. Moreover, OCIE notes that it has already integrated the Interpretation Regarding Standard of Conduct for Investment Advisers into the IAIC examination program. 

A continued priority of the OCIE will be examinations of RIAs that are dually registered as – or are affiliated with – broker-dealers or have supervised persons who are registered representatives of unaffiliated broker-dealers. Here, the areas of focus will include whether the firms’ compliance programs address the risks associated with best execution, prohibited transactions, fiduciary advice or disclosure of conflicts regarding such arrangements.

OCIE will also prioritize examining firms that utilize the services of third-party asset managers to advise clients’ investments to assess, among other things, the extent of these RIAs’ due diligence practices, policies and procedures.

OCIE also notes that it is interested in the accuracy and adequacy of disclosures provided by RIAs offering clients new types or emerging investment strategies, such as ESG criteria focused on sustainable and responsible investing.

Other 2020 examination priorities include: 

• Fintech, Digital Assets and Electronic Investment Advice. Advancements in financial technologies, methods of capital formation and market structures, as well as registered firms’ use of alternative data, warrant ongoing attention and review, according to the report. Continued examinations will include firms engaged in the digital asset space, as well as RIAs that provide services to clients through robo-advisers.
• Market Infrastructure. Entities that provide services critical to the functioning of capital markets, including clearing agencies, national securities exchanges, alternative trading systems and transfer agents, will be a continued focus. Particular attention will be on the security and resiliency of entities’ systems, the report notes.
• Information Security. OCIE will continue to prioritize cybersecurity and other information security risks across the entire examination program.
• Anti-Money Laundering Programs. Compliance with applicable anti-money laundering (AML) requirements, including whether entities are appropriately adapting their AML programs to address their regulatory obligations, will be subject to ongoing review. 
• FINRA and MSRB. Oversight of FINRA will include examinations on FINRA’s operations, regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also continue to examine the Municipal Securities Rulemaking Board (MSRB) to evaluate the effectiveness of its operations, procedures and controls.

FY 2019 Activity

Looking back at 2019, the OCIE notes that it completed 3,089 examinations. While this is a 2.7% decrease from FY 2018, the report observes that this may have been the result of the month-long suspension of virtually all examination activity due to the government shutdown. 

Examinations of RIAs in FY 2019 registered at approximately 2,180, covering 15% of this population, while examinations of investment companies increased by nearly 12% to more than 150. OCIE also completed more than 350 examinations of broker-dealers, 110 examinations of national securities exchanges and more than 90 examinations of municipal advisors and transfer agents. 

OCIE issued more than 2,000 deficiency letters during FY 2019, with many firms taking direct corrective actions in response to those letters, including by amending compliance procedures or a regulatory filing, enhancing their disclosures or returning fees back to investors.