Digital Assets, Cybersecurity, Fees, Conflicts Top List of SEC Exam Priorities

The Securities and Exchange Commission will place particular emphasis on examining digital assets, cybersecurity and retail investor issues relating to fees, expenses and conflicts of interest next year, according to the agency’s 2019 examination priorities.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) will also continue to monitor changes in the SEC’s registrant base, the markets, and investor needs and preferences, and will adjust its risk-based program in response to these changes.

The OCIE notes that its published priorities for 2019 are not exhaustive and will not be the only issues the office addresses in its examinations, Risk Alerts, and investor and industry outreach.

Next year’s examination priorities fall into six categories:

  • matters of importance to retail investors, including seniors and those saving for retirement;
  • compliance and risk at registrants responsible for critical market infrastructure;
  • select areas and programs of FINRA and MSRB;
  • digital assets;
  • cybersecurity; and
  • anti-money laundering programs.  

Retail Investors: In emphasizing the importance of protecting main street investors, the OCIE notes that 2019examinations will focus on:

  • the disclosure and calculation of fees, expenses and other charges investors pay;
  • the supervision of representatives selling products and services to investors;
  • broker-dealers entrusted with customer assets; and
  • portfolio management and trading.

With respect to mutual fund share classes, OCIE says it will continue to evaluate financial incentives for financial professionals that may influence their selection of particular share classes. In addition, the office remains focused on investment advisers participating in wrap fee programs.

The use of affiliated service providers and products will also be a focal point. The OCIE says it will concentrate on the impact to clients and the related disclosures of conflicts of interest that may be present with respect to portfolio management practices and compensation arrangements.

Investment adviser portfolio recommendations will also come under scrutiny, particularly in terms of assessing whether investment or trading strategies of advisers are:

  • suitable for and in the best interests of investors based on their investment objectives and risk tolerance;
  • contrary to, or have drifted from, disclosures to investors;
  • venturing into new, risky investments or products without adequate risk disclosure; and
  • appropriately monitored for attendant risks.

OCIE further emphasizes that it will continue to conduct risk-based examinations of certain investment advisers that have never been examined, including newly-registered investment advisers, as well as those registered for several years but that have yet to be examined.

Critical Market Infrastructure: Entities that provide services critical to the proper functioning of capital markets will continue to be examined, according to the report. Examinations will include, among others, clearing agencies, national securities exchanges and transfer agents, focusing on certain aspects of their operations and compliance with recently effective rules.

FINRA and MSRB:Examinations will focus on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors. The office will also examine MSRB to evaluate the effectiveness of select operations and internal policies and procedures.

Cybersecurity:OCIE will prioritize examining cybersecurity with an emphasis on proper configuration of network storage devices, information security governance and procedures related to retail trading information security.

Digital Assets: Given the significant growth and risks presented in this market, OCIE says it will continue to monitor the offer and sale, trading, and management of digital assets, and where the products are securities, examine for regulatory compliance.

Anti-Money Laundering Programs:Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.

Examination Uptick

The report further advises that OCIE completed over 3,150 examinations in FY 2018, which is a 10% increase over FY 2017. Moreover, coverage of investment advisers increased to approximately 17% of SEC-registered investment advisers, up from approximately 15% in 2017. Examinations of investment companies were also up this year, increasing by approximately 45%, the report notes.

“OCIE is steadfast in its commitment to protect investors, ensure market integrity and support responsible capital formation through risk-focused strategies that improve compliance, prevent fraud, monitor risk, and inform policy,” notes OCIE Director Pete Driscoll. “We believe our ongoing efforts to improve risk assessment and maintain an open dialogue with market participants advance these goals to the benefit of investors and the U.S. capital markets.”

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