What will the SEC Office of Compliance Inspections and Examinations be watching in 2020?

In announcing its 2020 examination priorities, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) says it will prioritize the examination of practices, products and services it believes present potentially heightened risks to investors and/or the integrity of the US capital markets. Many are perennial risk areas that the OCIE covers in its examinations, but noted as areas worth continued vigilance.

According to SEC Chairman Jay Clayton, “OCIE’s 2020 examination priorities identify key areas of risk, both existing and emerging, that we expect self-regulatory organizations (SROs), clearing firms, investment advisers and other market participants to identify and mitigate.”

“As markets evolve,” OCIE Director Pete Driscoll added, “so do risks and potential harm to investors…the annual priorities communicate where we see the potential for increased risk and related harm. We hope that this transparency helps firms evaluate and improve their compliance programs, which ultimately helps protect investors.”

Among OCIE’s 2020 examination priorities are: 

Retail investors, including seniors and those saving for retirement 

OCIE will continue its focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest. Professional targets will include the Investment Adviser-Investment Company (IAIC) and broker-dealer and exchange programs. For the IAICs, that will include RIAs, Broker-dealers and other registered firms. Targeted investments include mutual funds and exchange-traded funds (ETF), municipal securities and other fixed-income securities and microcap securities.

Keeping Fintech in the crosshairs

The OCIE will be looking at innovations and advancements in financial technologies, methods of capital formation, market structure and investor interface, particularly as registered firms increasingly use new sources of data often referred to as “alternative data” that may drive investor decision-making.

Digital assets will be one target, as the OCIE believes retail investors may not always understand the difference between these assets and more traditional products. For that reason, the regulators will be looking to assess:

1. Investment suitability;
2. Portfolio management and trading practices;
3. Safety of client funds and assets;
4. Pricing and valuation;
5. Effectiveness of compliance programs and controls; and
6. Supervision of employees’ outside business activities.

The OCIE also will continue to focus on RIAs that provided services to clients via automated investment tools and platforms, often referred to as “robo-advisers.”

Particular areas of focus include:

1. SEC registration eligibility;
2. Cybersecurity policies and procedures;
3. Marketing practices;
4. Adherence to fiduciary duty; and
5. Effectiveness of the RIA’s compliance programs.

OCIE targets “newbies!”

The OCIE will continue to review the compliance programs of RIAs, including whether those programs and their policies and procedures are reasonably designed, implemented and maintained. It will continue to prioritize 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.

BUT, the OCIE also will be looking at and conducting risk-based examinations of RIAs that have never been examined – including new RIAs and RIAs registered for several years that have not yet been examined.

Is that you? Will you be ready?

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