On January 7, 2020, the Office of Compliance Inspections and Examinations (“OCIE”) published the 2020 Examination Priorities which prioritizes certain practices, products, and services that it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets. In addition to the areas of focus identified for its 2020 examination program, OCIE included statistics from fiscal year 2019 to convey certain reference points that provide some insights into its examination program.
Fiscal Year 2019 Results
- OCIE completed 3,089 examinations of which 2,180 or approximately 15% of the examinations were of registered investment advisers (RIAs).
- OCIE issued more than 2,000 deficiency letters, with many firms taking direct corrective actions in response to those letters, including by amending compliance policies and procedures or a regulatory filing; enhancing their disclosures; or, returning fees back to investors, among other things.
- OCIE’s closed examinations have so far resulted in firms returning more than $70 million to investors.
Areas of focus for 2020
RIA Compliance Programs – OCIE will prioritize examinations of the following:
- RIAs dually registered, affiliated with a broker-dealer or have supervised persons who are registered representatives of unaffiliated broker-dealers, to determine whether the firms maintain effective compliance programs to address the risk associated with best execution, prohibited transactions, fiduciary advice, or disclosure of conflicts regarding such arrangements.
- RIAs utilizing services of third-party assets managers to advise clients’ investments to assess the extent of the due diligence practices, policies and procedures implemented.
- RIAs offering new types or emerging investment strategies such as sustainable and responsible investing, which incorporate environmental, social and governance (ESG) criteria, to determine if disclosures made are accurate and adequate.
RIAs to Private Funds
OCIE will focus on firms that provide management to separately managed accounts side-by-side with private funds to assess controls in place to prevent the misuse of material, non-public information and conflicts of interest, such as undisclosed or inadequately disclosed fees and expenses and the use of RIA affiliates to provide services to clients.
Never-Before or Not Recently-Examined Investment Advisers
OCIE will continue to conduct risk-based examinations of certain investment advisers that have never been examined, including newly-registered investment advisers as well as those registered for several years but that have yet to be examined.
Innovations and advancements in financial technologies, methods of capital formation, market structures, and investor interfaces continue to grow at a rapid pace. OCIE remains focused on keeping abreast of these developments, and examinations will focus on firms’ use of these data sets and technologies to interact with and provide services to investors, firms, and other service providers and assess the effectiveness of related compliance and control functions.
Fraud, Sales Practices, and Conflicts
OCIE will review recommendations and advice given to retail investors, especially seniors, teachers and military personnel and recommendations on higher risk products including private placements and securities of issuers in new and emerging risk areas that are complex or non-transparent, have high fees and expenses or where an issuer is affiliated with or related to the registered firm making the recommendation. In addition, OCIE will review for the elimination or disclosure of all conflicts of interest, including disclosure and supervision of outside business activities of employees and associated persons and revenue-sharing arrangements between registered firms and issuers, service providers and others where advisory personnel receive compensation for executing client transactions.
OCIE will review policies and procedures addressing certain types of products and services that may provide financial incentives to financial professionals such as using affiliated service providers and products, securities-backed non-purpose loans and lines of credit or borrowing funds from clients.
Standards of Care
OCIE will begin to assess implementation of the requirements of Regulation Best Interest, including policies and procedures regarding conflicts disclosures, and for both broker-dealers and RIAs, the content and delivery of Form CRS.
OCIE will identify and examine SEC-registered market participants engaged in the digital assets space and assess investment suitability; portfolio management and trading practices; safety of client funds and assets; pricing and valuation; effectiveness of compliance programs and controls; and, supervision of employee outside business activities.
FINRA and MSRB
Oversight of FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors.
The OCIE 2020 Examination Priorities can be read in its entirety here.