The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) continues another year of exam priorities for its Registered Investment Advisors (“RIA”) and Broker-Dealers. OCIE are the “eyes and ears” of the SEC, and its exams are used by the SEC to inform rule-making initiatives, identify and monitor risks, improve industry practices, and pursue misconduct.
For 2017, the OCIE focused on the following three areas: retail investors, risks specific to elderly and retiring investors, and assessing market-wide risks. Within the areas of emphasis, the letter focused on these common RIA regulatory compliance issues:
Never-Before Examined Investment Advisors
This is a continued focus area since 2016. The SEC will not only focus on offices or advisors who have been registered for a long period but have never been examined by the OCIE (which was their focus area in 2016) but also, newly registered offices and advisors. Therefore, advisors and offices should not take comfort in thinking that new registration or a record of a regulatory exam gives you a break from a visit from OCIE. Be prepared….it may be coming.
Wrap Fee Programs
This year the OCIE has pinpointed its focus on advisors and advisory firms that have wrap fee accounts. During the examination, fiduciary duty and contractual obligations to clients will be scrutinized. The areas tested may include wrap account suitability, effectiveness of disclosures, conflicts of interest and brokerage practices including best execution and trading away.
Share Class Selection
The OCIE will continue to focus on hybrid RIA firms and conflicts of interest related to share class selection of mutual funds. Those who wear two hats are a focus for exams as the OCIE will review for influences to recommend share classes with higher loads or distribution fees. The formulation of investment recommendations and management of client portfolios will be reviewed to look for conflicts in this area.
Senior Investors continues to be a focus area in the industry and the OCIE letter confirms this. In 2016, the OCIE combined the 1st and 2nd focus area this year into a single focus area last year, however this year they clearly stated elderly investors in their theme. This may lead to an inference that the OCIE wants to emphasize their priority in this area. The OCIE will examine how advisors manage their interactions but more importantly, identity senior exploitation. Products and services offered to senior investors will be analyzed as well as supervisory controls.
In 2015, the OCIE launched an initiative focusing on investment advisors and broker-dealers’ services that are offered to investors with retirement accounts. This focus area continues to be an initiative for the OCIE with a specific examination focus area on variable insurance products, sales and management of target date funds, and cross transactions related to fixed income securities.
This is the third year that cybersecurity has been a focus area for OCIE. With the industry focus and more importantly public media breaches of cybersecurity within the financial sector it was not surprising. Advisors will be examined on their procedures, controls, and testing the implementation of the procedures and controls.