Each year, the SEC’s Office of Compliance, Inspections, and Examinations (OCIE) issues its examination priorities for the coming year. In its 2020 guidance for firms issued on January 7, OCIE reiterated its commitment to focusing on conducting risk-based examinations for RIAs advising retail investors, RIAs advising private funds, investment companies, broker-dealers, and municipal advisors.
In addition, if your firm is a newly-registered investment adviser or has been operating for years but has never been examined by OCIE, the odds of your firm’s name being on the list for inspection in 2020 is greater.
FY 2020 Priorities Build on OCIE’s FY 2019 Successes
OCIE’s announcement reminds firms that its efforts are making a real difference in promoting compliance throughout the financial services industry, and ultimately protecting investors. The 2020 announcement highlighted notable statistics from OCIE’s FY 2019 examinations.
In total, OCIE conducted 3,089 examinations during its last fiscal year, including 2,180 RIA exams. That figure represents approximately 15 percent of all SEC-registered advisers. As a result of its examination efforts, the regulator issued more than 2,000 deficiency letters and ordered firms to return more than $70 million to investors.
Broad Exam Initiatives Designed to Enhance Industry Compliance
The full 2020 list includes items SEC registrants have come to expect to see noted each year, like retail investor protections and anti-money laundering (AML), as well as new initiatives driven largely by technological change. Highlights include the following priorities:
- Retail Investors. OCIE will continue to focus on fraud and firms’ sales practices, with special attention on matters that impact retail investors, especially seniors. Examiners will look carefully at things like fees, conflicts of interest, OBAs, revenue sharing. Suitability, portfolio management, safety, pricing and valuation, OBAs, and overall compliance program effectiveness.
- Market infrastructure. Examiners will focus on system security and other compliance measures used by clearing agencies, national securities exchanges, alternative trading systems, and transfer agents.
- Information Security. As cybersecurity threats continue to loom large, OCIE will focus on firms’ security efforts and will review the adequacy of safety measures for cloud-based storage and network storage devices. RIAs should anticipate examiners’ interest in the processes firms use to protect client information.
- Risk-Based Exams. As previously mentioned, OCIE intends to focus on firms that have never been examined, including RIAs that advise retail investors as well as those advising private funds. These advisors should expect to face scrutiny surrounding firms’ controls related to conflicts of interest, fees, expenses, and data privacy.
- AML Programs. SEC examiners will review how well firms are meeting their CIP and SAR obligations, conducting customer due diligence, and complying with beneficial ownership requirements. Examiners will also focus on independent AML program testing.
- FinTech. Advances in technology, including firms’ use of digital assets and alternative data pose new risks to investors. In its FY 2020 review cycle, OCIE will review firms’ use of, and reliance on, FinTech with an eye toward compliance controls and risk mitigation efforts.
- FINRA and MSRB. OCIE also indicated its intention to review the quality and effectiveness of current FINRA examinations and MSRB operations and regulatory programs.
Other subject areas noted in the 2020 exam priorities announcement include corporate governance, data controls, third-party advisor oversight and vendor management, new and emerging investment strategies with an emphasis on the adequacy of disclosures provided to investors, dually-registered advisors, and compliance training programs.
Is your firm prepared for a regulatory audit this year? Firms subject to SEC regulation/oversight should review the entire 28-page publication and consider using it to supplement compliance testing and internal audit efforts. If your compliance systems and processes are hindering rather than helping your firm’s compliance efforts, it may be time to explore adopting an enterprise-wide RegTech solution.
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