On 11 January 2016 the United States Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its 2016 Examination Priorities. As a reminder, OCIE serves as the “eyes and ears” of the SEC, conducting examinations of all regulated entities which includes investment advisers, broker-dealers, funds, and transfer agents. OCIE highlights three thematic areas for its 2016 priorities:
- Protecting Retail Investors and Investors Saving for Retirement;
- Assessing Market-Wide Risks; and
- Using Data Analytics to Identify Signals of Potential Illegal Activity.
Protecting Retail Investors and Investors Saving for Retirement
OCIE states protecting retail investors and retirement savers remains a priority in 2016. OCIE identifies six areas related to retail investors and retirement savers it intends to focus on this upcoming year.
- ReTIRE: focusing on SEC-registered investment advisers and broker dealers and the services they offer to investors with retirement accounts;
- Exchange-Traded Funds: OCIE will examine ETFs for compliance with applicable exemptive relief granted, as well as ETF unit creation and redemption processes;
- Branch Offices: OCIE will continue to review regulated entities’ supervision of registered representatives and investment adviser representatives in branch offices;
- Fee Selection and Reverse Churning;
- Variable Annuities: suitability of sales and adequacy of disclosure; and
- Public Pension Advisers: OCIE will focus on pay-to-play and gifts and entertainment.
Assessing Market-Wide Risks
OCIE further pronounces its intent to examine for structural risks and trends that may involve multiple firms or entire industries in order to maintain fair, orderly and efficient markets. The market-wide risks OCIE identifies as focus areas are:
- Regulation Systems Compliance and Integrity (“SCI”);
- Liquidity Controls; and
- Clearing Agencies.
Using Data Analytics to Identify Signals of Potential Illegal Activity
The SEC and OCIE have become major proponents of using data analytics to identify risks in the financial system or within individual firms since the financial crisis. The SEC has developed an extensive data analytics capability which it now utilises to identify elevated risks. In 2016, the areas of focus the SEC intends to leverage its data analytics capabilities are:
- Recidivist Representatives and their Employers: The SEC will track individuals with a record of misconduct and examine the firms that employ them;
- Anti-Money Laundering;
- Microcap Fraud;
- Excessive Trading; and
- Product Promotion.
As in previous years, OCIE identifies other initiatives as well. In addition to the areas identified, OCIE states its intention to allocate examination resources to other priorities. Some of OCIE’s other initiatives in 2016 include:
Never-Before-Examined Advisers and Investment Companies; and
Private Fund Advisers: The SEC will maintain its focus on fees and expenses.
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