As it has for almost a decade, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) announced Tuesday its examination priorities for the new year. As in recent years, both Main Street investors and the Financial Industry Regulatory Authority (FINRA) are on the office’s radar for the upcoming year. Indeed, “many of the themes” on the OCIE’s priorities list “are perennial risk areas,” the office notes in its 2020 Examination Priorities document.
“We hope that this transparency helps firms evaluate and improve their compliance programs, which ultimately helps protect investors,” said OCIE Director Pete Driscoll in an accompanying press release.
What to expect in fiscal year 2020
On the OCIE’s plate this year are the following examination priorities:
- Retail investors
In an effort to protect so-called Main Street investors (including seniors and people saving for retirement), the OCIE plans to review disclosures concerning fees, expenses, and conflicts of interest.
- Market infrastructure
Clearing agencies, national securities exchanges, alternative trading systems, and transfer agents that provide services critical to the functioning of capital markets—and, in particular, the security and resiliency of their systems—are an OCIE focus this year.
- Information security
Cyber-security and other information security risks remain a priority.
- Focus areas relating to investment advisers, investment companies, broker-dealers, and municipal advisors
The OCIE plans to focus on registered investment advisers that have never been examined. Investment companies can expect scrutiny of mutual funds and exchange-traded funds, the activities of their registered investment advisers, and the oversight practices of their boards of directors. As for broker-dealers, the OCIE’s focus will be on their trading practices and preparation and implementation of recent rules. Municipal advisors’ fiduciary obligations to municipal clients will be a focus along with review of registration and continuing education.
- Anti-money laundering programs
Whether organizations are adapting their anti-money laundering programs to keep up with regulatory obligations are on the OCIE’s priorities list in 2020.
- Financial technology and innovation
Entities working in the digital assets sphere and registered investment advisers that provide service through automated investment tools (AKA “robo-advisers”) are getting the OCIE’s attention this year.
- FINRA and MSRB
The OCIE plans to continue its oversight of FINRA by focusing on its operations, regulatory programs, and the quality of its examinations of broker-dealers and municipal advisors. The OCIE also is committed to continue examining the Municipal Securities Rulemaking Board to assess the effectiveness of its operations and internal policies, procedures, and controls.
How are they doing?
In fiscal year 2019, the OCIE completed 3,089 examinations, a 2.7 decrease from the prior fiscal year likely attributable to the month-long government shutdown. The breakdown included examinations of:
- 2,180 registered investment advisers (15 percent of the population)
- More than 150 investment companies
- More than 350 broker-dealers
- 110 national securities exchanges
- More than 90 municipal advisors and transfer agents
- More than 160 examinations of FINRA (examinations of program areas and oversight review of FINRA examinations)
- 15 clearing agencies
Those figures don’t quite add up to the claimed 3,089 examinations but are approximations provided by the OCIE in its 2020 Examination Priorities document. Also in FY2019, the OCIE issued more than 2,000 deficiency letters.
Will you be on their list?
The OCIE also uses a risk-based approach in choosing whom to examine, and its choices vary depending on the type of registered firm and the nature of that firm’s business. Among the risk factors considered for registered investment advisers and broker-dealers are the products and services offered, compensation and funding arrangements, prior examination observations, disciplinary history, changes in leadership, and whether a firm has access to investor assets, the OCIE noted in its 2020 Examination Priorities document.
Ultimately, the OCIE’s efforts focus on “promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy,” according to its Examination Priorities document.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.