Articles Posted in January, 2015

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its Examination Priorities for 2015.  The priorities represent certain practices and products that OCIE believes present a potentially higher risk to investors and/or the integrity of the US capital markets.  In 2015, OCIE’s priorities focus on issues involving investment advisers, broker-dealers and transfer agents and are organized into three thematic areas:

1. Examining important matters to retail investors and investors saving for retirement, such as whether the information, advice, products and services offered is consistent with applicable law.  Specifically, OCIE has identified the following examination priorities:

• Fee Selection and Reverse Churning – Where an adviser offers a variety of fee arrangements, OCIE will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.
• Sales Practices – OCIE will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.
• Suitability – OCIE will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities and whether the suitability of the recommendations or determinations are consistent with existing legal requirements.
• Branch Offices – OCIE will focus on registered entities’ supervision of registered representatives and financial adviser representatives in branch offices, and attempt to identify branches that may be deviating from compliance practices of the firm’s home office.
• Alternative Investment Companies – OCIE will continue to assess alternative investment companies and focus on: (i) leverage, liquidity and valuation policies and practices; (ii) factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and (iii) the manner in which such funds are marketed to investors.
• Fixed Income Companies – OCIE will determine whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading.

2. Assessing issues related to market risks.  Specifically, OCIE has identified the following examination priorities:

• Large Firm Monitoring – OCIE will continue to monitor the largest broker-dealers and asset managers to assess risks at individual firms.
• Clearing Agencies – OCIE will continue to examine all clearing agencies designated as “systemically important” under the Dodd-Frank Act.
• Cybersecurity – OCIE will continue to examine broker-dealers and investment advisers’ cybersecurity compliance and controls and expand these examinations to include transfer agents.
• Potential Equity Order Routing Conflicts – OCIE will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.

3. Analyzing data to identify and examine registrants that may be engaging in illegal activity, such as excessive trading and penny stock, pump-and-dump schemes. Specifically, OCIE has identified the following examination priorities:

• Recidivist Representatives – OCIE will continue to try to identify individuals with a history of misconduct and examine the firms that employ them.
• Microcap Fraud – OCIE will continue to examine broker-dealers and transfer agents that aid and abet pump-and-dump schemes or market manipulation.
• Excessive Trading – OCIE will continue to analyze data from clearing brokers to identify and examine brokers that engage in excessive trading.
• Anti-Money Laundering – OCIE will continue to examine firms that have not filed suspicious activity reports (SARs) or provide customers with direct access to markets of higher-risk jurisdictions.

In addition, OCIE has identified other examination priorities for 2015, including:

• Municipal Advisors – OCIE intends to examine newly registered municipal advisors to determine whether they comply with recently adopted SEC and Municipal Securities Rulemaking Board rules.
• Proxy Services – OCIE intends to examine proxy advisory service firms and investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors.
• Never-Before-Examined Investment Companies – OCIE will conduct focused, risk-based examinations of registered investment company complexes that haven’t been examined before.
• Fees and Expenses in Private Equity – this continues to be an area that OCIE is focused on.
• Transfer Agents – OCIE intends to examine transfer agents, particularly those involved with microcap securities and private offerings.