The Securities and Exchange Commission (“SEC”) recently announced its examination priorities for the upcoming year. The report highlights areas of risk that the agency’s Office of Compliance Inspections and Examinations (“OCIE”) will target when examining registered firms.
The SEC’s 2015 exam priorities should be required reading for investment advisers, broker-dealers, and transfer agents. As noted by OCIE Director, Andrew Bowden, “We share our annual examination priorities to promote compliance. We have observed that when we share our areas of focus, many industry participants independently review their controls in the areas we have identified.”
Below are a few key takeaways:
Market-Wide Risks: The SEC intends to examine for structural risks and trends that may involve multiple firms or entire industries. Particular areas of concern include cybersecurity compliance and controls; broker-dealers’ compliance with best execution duties in routing equity order flow; annual examinations of clearing agencies pursuant to the Dodd-Frank Act; and monitoring large broker-dealers and asset managers to ensure early detection of industry-wide developments.
Big Data: The SEC will continue to rely on its increased data analytic capabilities to identity individuals and firms that appear to be potentially engaged in fraudulent and/or other potential illegal activity. Specific attention will be devoted to so-called recidivist brokers with a track record of misconduct, microcap fraud, excessive trading, and broker-dealers’ anti-money laundering programs.
Fee Structures: Given the high rate of deficiencies that examiners have observed among advisers to private equity funds, the SEC plans to conduct examinations targeting fees and expenses. For advisers that offer a variety of fee arrangements, the SEC will also 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.
Ongoing and New Initiatives: The SEC’s efforts to conduct examinations of newly registered municipal advisors to assess their compliance with recently adopted SEC and Municipal Securities Rulemaking Board rules will continue into 2015, as will its initiative targeting registered investment company complexes that have not yet been examined.New for 2015, the SEC announced plans to devote more resources to examine transfer agents, particularly those that are involved with microcap securities and private offerings.
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