The SEC's Office of Compliance and Examinations (OCIE) announced its 2018 Examination Priorities. The Priorities should be viewed as a "floor," not a "ceiling" in assessing risk and focus areas for Duff & Phelps clients. Common exam areas relating to conflicts, risk disclosures, safety of client assets, fees and expenses, compensation, valuation, liquidity, best execution, microcaps, suitability, marketing and performance claims, supervision, recidivists and cybersecurity are still very much on the examiners' target list. This year marks a new focus on cryptocurrencies and ICOs, even as the debate continues over whether these can be fairly classified as securities. Clients whose businesses have an impact, either directly or indirectly, on retail investors, retirees, or seniors will continue to be under scrutiny.
More specifically, the OCIE's examination priorities include:
- Cybersecurity – Each of OCIE's examination programs will prioritize cybersecurity with an emphasis on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response.
- Disclosure of the Costs of Investing – OCIE will continue to focus on proper disclosure of fees, expenses and other charges, with an emphasis on incentive/ sales based compensation arrangements, changes in fee structures and private funds with a high concentration of retail, non-profit and pension plan investors.
- Cryptocurrency, Initial Coin Offerings (ICOs), Secondary Market Trading and Blockchain – In order to address the influx of investment advisers and broker-dealers engaged in the cryptocurrency and ICO space, the examiners will closely monitor the sale of digital products and assess the adequacy of antifraud safeguards and disclosure concerning risk of loss, liquidity, price volatility and potential fraud.
- Compliance and Risks in Critical Market Infrastructure – OCIE will continue to examine clearing agencies, national securities exchanges, and transfer agents and other entities that provide services critical to the proper functioning of capital markets.
- Anti-Money Laundering Programs – Examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations and making timely filings.
- Electronic Investment Advice – OCIE will continue to examine "robo-advisers" to assess the adequacy of their compliance programs, including the oversight of algorithms that generate recommendations, marketing materials, investor data protection and disclosure of conflicts of interest.
- Never-Before-Examined Investment Advisers – OCIE will focus on investment advisers that are either newly registered, or who have not been examined for some period of time (typically 7-10 or more years). Generally, these are limited scope exams that focus primarily on safety of client assets, code of ethics, and the advisers' compliance program.
- FINRA and MSRB – OCIE will continue its oversight of FINRA by focusing examinations on FINRA's operations and regulatory programs and the quality of FINRA's examinations of broker-dealers and municipal advisors.
- Fixed Income Order Execution – Examiners plan to conduct examinations to assess whether broker-dealers have implemented best execution policies and procedures for municipal and corporate bond transactions.
Read the full SEC press release.