The Office of Compliance Inspections and Examinations (OCIE) of Securities and Exchange Commission (SEC) has revealed its examination priorities for the year 2019, on December 20, 2018.
Every year OCIE publishes its examination priorities to emphasize its commitment to transparency, and promote it in the examination programs. The OCIE examination priorities are provided to give insights into the areas believed to have the tendency to present higher risk to investors or the integrity of the U.S. capital markets.
The six broad – but non-exhaustive – topics for the year 2019 priorities are as follows;
Retail investors (including seniors and those saving for retirement)
Compliance and risk in registrants responsible for critical market infrastructure (clearing agencies, transfer agents, national securities exchanges and regulation SCI entities)
Oversight of the Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB).
Cybersecurity and anti-money laundering Programs.
Although, many of the six broad topics remain the same as those included in the 2018 OCIE Examination Priorities. It is important to note that digital assets is the only new topic for 2019 compared to 2018. The 2019 priorities show that OCIE puts more efforts to areas that are found to give concerns in examinations of entities, many of which involved failure to properly provide security to clients assets and the adequacy of disclosures of conflicts of interest.
1. Retail Investors, including Seniors and those Saving for Retirement
In 2019, the first priority is the protection of retail investors. OCIE shows that they will continue to focus examinations on the disclosure and calculation of charges investors pay, the supervision of representatives selling to investors, broker-dealers entrusted with customer assets, and portfolio management and trading. OCIE emphasizes the following areas of focus, most of which continue and/or expand upon existing examination priorities:
A. Fees and Expenses: Disclosure of the Costs of Investment
Fees and Expenses – OCIE will continue to look for transparency and proper disclosure of investment costs to investors.
B. Conflicts of Interest
To ensure advisers adequately disclose Conflicts of interest with respect to investment advisers and broker-dealers to investors. OCIE focus on:
portfolio management practices and compensation arrangements
financial incentives to recommend securities-backed non-purpose loans and lines of credit to investors
borrowing funds from clients.
C. Senior Investors, and Retirement Accounts and Products
OCIE will check for possible cases of exploitation of senior and retirement investors by registered representatives, compliance programs of investment advisers, appropriateness of investment recommendations provided to senior investors and also the supervision of employees and representatives with respect to their interactions with senior investors and retirement savers.
D. Portfolio Management and Trading
OCIE’s examinations will check investment advisers’ portfolio management processes, allocation of investment opportunities among clients and disclosure of critical information to its clients along with other things.
E. Revalidation of Investment Advisers
OCIE will continue to prioritize review of investment advisers, to ensure newly registered investment advisers or those that have substantially grown or changed business models have knowledge of the most recent developments and models.
Other areas that OCIE emphasize include;
Municipal Advisors – Reaching municipal advisors that have never been examined.
Broker-Dealers Entrusted with Customer Assets
Mutual Funds and Exchange-Traded Funds
2. Compliance and Risks in Critical Market Infrastructure
OCIE will continue to conduct yearly examinations of entities that are crucial for the activities of the capital markets. They will conduct examinations of firms which provides services such as:
Entities Subject to Regulations Systems Compliance and Integrity (SCI), including the effectiveness of the implementation of such entities’ compliance policies and procedures
National Securities Exchanges
3. Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB).
OCIE will continue to examine FINRA’s operations and regulatory programs, the quality of its examinations of broker-dealers, and the effectiveness of particular MSRB operational and internal policies, procedures and controls.
4. Digital Assets
Digital assets or cryptocurrencies were included under the retail investor category in 2018, but they are now a separate category in the 2019 priorities. In response to the rapid growth of the market for digital assets, OCIE’s priorities is a focus on the examination of participants in the digital asset market. OCIE’s examinations will focus on portfolio management of digital assets, pricing of client portfolios, trading, safety of client funds and assets, and compliance and internal controls relating to digital assets along with other areas.
5. Cybersecurity and Anti-Money Laundering Programs
Cybersecurity is an important focus of each OCIE examination program as well as adherence to anti-money laundering policies. OCIE’s examination programs will prioritize cybersecurity with an emphasis on information security governance, and policies and procedures related to retail trading information security.
OCIE’s priorities for 2019 are very similar to those from 2018, with the notable inclusion of digital assets as a separate priority, instead of being part of a category under retail investment. The changes in the priorities indicate where OCIE intends to focus resources in the 2019, and registrants should not expect examinations to be limited to the issues highlighted above. It is important to note that the 2019 OCIE priorities not only reflect the managements’ emphasis on Main Street investors, technological changes and cybersecurity, but also continue to reflect a considerable degree of continuity with the priorities of the SEC previously established.