January 14, 2019
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) has issued its examination priorities for 2019. In it, OCIE points out that its examination program covers some 13,200 investment advisers with managed assets of about $84 trillion, approximately 10,000 mutual funds and ETFs, roughly 3,800 broker-dealers, about 330 transfer agents, 7 active clearing agencies, 21 national securities exchanges, nearly 600 municipal advisors, the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), the Securities Investor Protection Corporation and the Public Company Accounting Oversight Board.
In its newly published list of priorities, OCIE said that, in the coming year, it will focus on six principal areas:
As OCIE always notes, this is not an exhaustive list. OCIE will identify and focus on additional priorities as needed to address changing conditions. OCIE’s examinations also will continue to be guided by the same four “pillars” presented in OCIE’s examination priorities for 2018: (1) promoting compliance; (2) preventing fraud; (3) identifying and monitoring risk; and (4) informing policy.
OCIE will continue to prioritize protecting retail investors, particularly senior investors and retirement savers. To that end, OCIE will focus on:
Absent from the 2019 examination priorities as compared to 2018 examination priorities in the retail investor space is the monitoring of investment advisers and broker-dealers that offer investment advice through automated or digital platforms (e.g., robo-advisers). We do not believe however, that such omission necessarily signals OCIE’s intention to shift its attention away from robo-advisers, especially in light of the SEC’s recent examination of and enforcement actions against such advisers or broker-dealers. Industry participants should accordingly remain focused on addressing risks relating to investment advice offered through automated or digital platforms, which will continue to be of interest to OCIE.
OCIE will continue to focus on the same four groups of registrants responsible for critical market infrastructure as it did last year:
OCIE’s focus on FINRA and MSRB remains largely identical to last year. OCIE will continue its inspection of FINRA’s operations and regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors that are also registered as broker-dealers. OCIE will continue its examination of MSRB to evaluate the effectiveness of its policies, procedures and controls.
In response to the rapid growth of the market for digital assets, including cryptocurrencies, and the rapid development of blockchain technology, OCIE’s examinations will focus on, among other things, portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios and compliance and internal controls relating to digital assets. Digital assets were included under the retail investor category last year, but they are now a separate standalone category.
As with previous years, OCIE will continue prioritizing cybersecurity, emphasizing, among other things, proper configuration of network storage devices, information security governance generally and policies and procedures related to retail trading information security. Specific to this year, OCIE will also concentrate on cybersecurity practices at investment advisers with multiple branch offices, including those that have recently merged with other investment advisers.
OCIE will continue its examination of broker-dealers for compliance with their AML obligations, including whether they are meeting their suspicious activity report (SARs) filing obligations, implementing all elements of their AML programs and robustly and timely conducting independent tests of their AML program.
OCIE’s priorities for 2019 are very similar to those from 2018, with the notable but unsurprising addition of digital assets and blockchain as their own category. OCIE’s continued “pivot” (our term, not theirs) from private funds to a focus on retail savers, registered investment companies and ETFs also appears to signal a clear trend. But, as we cautioned when reviewing OCIE’s 2018 priorities at the start of last year, the private funds community should continue to remain vigilant. While not a “priority,” we expect that OCIE will continue its focus on private fund managers.