SEC’s Office of Compliance Inspections and Examinations Announces Examination Priorities for 2020

01.09.2020

On January 7, 2020, the Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) announced its examination priorities for fiscal year 2020. A copy of OCIE’s 2020 Examination Priorities is available here.

In 2020, OCIE will prioritize certain practices, products and services that it believes present potentially heightened risks to investors or the integrity of the U.S. capital markets, including the following areas of focus:

• Recent Rulemaking and Interpretations. New SEC rules and interpretations finalized in 2019 were designed to enhance the quality and transparency of retail investors’ relationships with registered investment advisers (RIAs) and broker-dealers. Specifically, these actions included new Regulation Best Interest applicable to broker-dealers, the new Form CRS Relationship Summary and two separate interpretations under the Investment Advisers Act of 1940.  Before the June 30, 2020 compliance date for Regulation Best Interest and Form CRS, OCIE will work with broker-dealers on their integration of the new rules and related questions they may have.  After the compliance dates, OCIE expects to assess implementation of the requirements of Regulation Best Interest by broker-dealers, and for both broker-dealers and RIAs, the content and delivery of Form CRS.  RIAs should note that OCIE has already integrated the Interpretation Regarding Standard of Conduct for Investment Advisers into its examination program.

• Retail investors, including seniors and individuals saving for retirement. OCIE intends to prioritize examinations (i) of intermediaries that serve retail investors, namely RIAs, broker-dealers, and dually-registered firms, and (ii) focused on retail-targeted investments, such as mutual funds, ETFs, municipal securities, other fixed income securities and microcap securities.  In particular, OCIE will continue to seek to uncover fraud, evaluate sales practices and assess whether RIAs, as fiduciaries, have fulfilled their duties of care and loyalty to clients. 

• Information security. OCIE will work to identify and address information security concerns, including cybersecurity risks and vendor risk management.
• Financial technology (fintech) and innovation. Exams will focus on the use of alternative data and technologies, digital assets and automated investment tools and platforms, and the effectiveness of related compliance and control functions. 
• Focus areas involving RIAs and investment companies. The examination program will continue to prioritize examinations of (i) RIAs that are dually registered as (or otherwise affiliated with) broker-dealers and (ii) RIAs that were previously examined, but have not been examined for a number of years.  OCIE will also continue to conduct risk-based examinations of RIAs that have yet to be examined and review RIAs to private funds (particularly those that have a greater impact on retail investors) to assess compliance risks, including controls regarding material, non-public information and conflicts of interest, such as undisclosed or inadequately disclosed fees and expenses, as well as the use of RIA affiliates to provide services to clients.[1]  OCIE also has a particular interest in disclosures regarding new or emerging investment strategies, such as ESG investing. 

• Focus areas involving broker-dealers and municipal advisors. In addition to an emphasis on sales tactics, broker-dealer examinations will focus on broker-dealer financial responsibility (including safeguarding of customer assets in accordance with the Customer Protection Rule[2] and the Net Capital Rule[3]), trading and risk management (including trading in “odd lots” and use and supervision of automated trading algorithms) and municipal advisors.
• Anti-money laundering (AML) programs. The examination program will continue to prioritize examining broker-dealers and investment companies for compliance with applicable AML obligations.
• Market infrastructure. OCIE will assess the practices of firms that provide services critical to the functioning of capital markets, including clearing agencies, national securities exchanges, alternative trading systems and transfer agents.
• FINRA and MSRB. OCIE will continue to conduct risk-based examinations of FINRA and MSRB to identify areas of concern and evaluate the effectiveness of major regulatory programs.

• LIBOR transition. As SEC registrants and other market participants transition away from LIBOR as a widely used reference rate in a number of financial instruments to an alternative reference rate, OCIE will be reviewing firms’ preparations and disclosures regarding their readiness, particularly in relation to the transition’s effects on investors.

If you have any questions regarding OCIE’s 2020 Examination Priorities or for further information about this Alert, please contact one of the following authors or another attorney on Hirschler’s Investment Management Team.

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[1] While OCIE’s 2020 Examination Priorities emphasizes increased examination coverage of RIAs (examining 17% of RIAs in 2018 and 15% in government shutdown-shortened 2019, up from 10% in 2014), it also highlights the risk that industry growth, increased complexity and other factors may result in OCIE having insufficient resources to adequately cover the RIA industry.

[2] Rule 15c3-3 under the Securities Exchange Act of 1934 (Exchange Act).

[3] Rule 15c3-1 under the Exchange Act.