The Securities and Exchange Commission’s (SEC) and Office of Compliance Inspection and Examination (OCIE) examination priorities seek to focus where it will have the most impact in protecting the investing public. The office seeks insight into the evolving markets and associated risks as well as changes in risks to investors. Most important is the recognition that the examination program will continue to evolve based on new market risks identified by the SEC.
The 2019 OCIE Priority Letter focuses on six broad topics. Joe Guarino, MCG Senior Consultant, says “many of the six broad topics the OCIE identified are the same as those included in the 2018 OCIE Examination Priorities Letter. Although the 2019 priorities point to where OCIE plans to focus in the coming year, registered advisers should expect examinations to not be limited to just the six issues. With this in mind, we can assist in reviewing policies, procedures and conducting internal compliance reviews”.
OCIE 2019 Themes
These six themes are related to products, services, and practices that OCIE believes have high-risk potential as well as being capable of demeaning the integrity of the US capital markets.
The broad areas of focus are;
Expenses and fees;
Like past years, OCIE will focus on disclosure to investors on the cost of investing in the market. They will also ensure the various registrants are charging as well as calculating the exact fees. According to OCIE, the SEC will make a list of the various firms with business models and practices that create increased risks of undisclosed fees, expenses, as well as other charges. This list will include firms that pay incentives to financial experts and professionals to select a number of mutual funds over others; and also advisers that participate in wrap fee programs. Basically, OCIE examination priorities will list firms that pay financial experts to write favorable reviews.
Conflicts of interest;
The aim of OCIE is to ensure that all registered investment advisers operate in a manner in accordance with their fiduciary duty. Consequently, examinations will focus on whether advisers are appropriately disclosing conflicts of interest as well as the potential impact of these conflicts on their clients and prospective clients. OCIE will focus this year on conflict of interests associated with affiliated producers and products, the borrowing of funds, and the availability of a security-backed non-purpose line of credit.
- Retirement accounts and senior investors;
The SEC will focus examinations on how various broker-dealers oversee interactions with senior investors. They will examine the type of services and products offered by various registered investment advisers to those saving for retirement. The OCIE will focus on the appropriateness of recommendations made to senior investors. They will also focus on the firms’ careful supervision of employees involved in providing services and products to senior investors.
- Management of portfolio and trading;
According to the published report, OCIE seeks to ensure that all registered investment advisers do the following;
- Are equally allocating investment opportunities to all their clients
- Maintain policies that will ensure consistency of investments with the objective or goal of the client in mind.
- Advisers appropriately disclose or inform their clients of any critical trading detail.
- Advisers are in full compliance with all applicable legal restrictions for each client investments.
- New and recently examined investment advisers;
As in previous years, OCIE will pay close attention to investment advisers recently examined. It will also pay attention to advisers that are new or have significantly changed their business models or practices.
- ETF’s and Mutual Funds;ETF’s and Mutual funds are the main investment vehicles for many retail investors. OCIE will give priority to the examination of such funds, their boards, and their advisers. OCIE will focus on regulatory compliance and industry practices in areas that may have significant impact on retail investors. Areas include but are not limited to;
- Exchange Trust Funds (ETFs) that have little secondary trading volume under their control
- Index funds that are capable of tracking custom-built indexes.
- Any type of fund that has higher allocations to a number of assets that have been securitized.
- Funds that have underperformed when compared to their peer groups
- Funds managed by advisers new to the management of registered investment firms
- Advisers that claim to provide or offer services to both private and registered funds with similar investment strategies.
Other examination areas;
The OCIE will continue to conduct examinations on these industry players;
- Municipal advisers; examinations on municipal advisers not conducted will be examined to ensure they are in full compliance with the law.
- Brokers and Dealers entrusted with the investment of client’s funds will be examined.
A Culture of Compliance remains Key
Stephen O. Simon, MCG Senior Consultant, states “once again, similar to the SEC, FINRA has provided practical and valuable guidance for member firms and other interested parties on its focus for 2019. Firms, however, should be very careful not to direct its attention to the new initiatives for 2019 at the expense of looking at the firm as a whole. One of the main keys for complying with the relevant FINRA rules and federal rules and regulations, is the creation of a culture of compliance. Additionally, firm’s should ensure their hiring practices contribute to and buttress that culture is extremely important”.
Joseph Guarino, MCG Senior Consultant, provides expertise in developing and maintaining compliance programs within the trust, banking and asset management business. He is a seasoned SEC Examiner and Chief Compliance Officer with broad operational experience and product knowledge.
Stephen O. Simon, MCG Senior Consultant, possesses over 20 years securities industry expertise as a supervisor with FINRA. He is recognized as a national expert in the membership application process (MAP). Stephen is also versed in FINRA’s examination and CORE sections.