SEC’s 2018 Exam Priorities – Worth the Wait

The SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2018 National Exam Program Examination Priorities on February 7, 2018 (“2018 Priorities Letter”). While issued later than in years past and almost a month to the day after the publication of the priorities letter from the Financial Industry Regulatory Authority (FINRA), OCIE deserves credit for the increased transparency and guidance provided in the 2018 Priorities Letter. By way of perspective, OCIE’s sixth publication of its examination priorities more than doubled the amount of information provided in last year’s edition. This improved transparency is consistent with the public statements of OCIE’s Director. Despite the greater detail, there appears to be one glaring omission: OCIE does not discuss how the anticipated rulemaking by the Commission regarding the development of a fiduciary standard may impact its priorities. However, upon further consideration and recalling that OCIE’s primary mission is to conduct examinations to assess compliance with the current securities laws, we realize it would have been premature for OCIE to discuss views on some yet-to-be formulated SEC fiduciary standard. That said, OCIE is clearly prioritizing the protection of retail investors even more than in years past, which is consistent with the SEC Chairman’s public statements about prioritizing the protection of “Main Street” investors. While the SEC Chairman has made these issues a “Main” priority, the SEC’s heightened focus regarding retail and retirement investors has been strengthening significantly since the Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative announced a few years ago and through the SEC’s announcement this past autumn of the Retail Strategy Task Force. Thus, OCIE leads into the 2018 Priorities Letter in the second and third sentences by opening with: “…we will continue to prioritize our commitment to protect retail investors, including seniors and those saving for retirement. We will especially be looking closely at products and services offered to retail investors, as well as the disclosures they receive about those investments.” This focus is similar to the focuses emphasized by FINRA in its recent priorities letter.

OCIE continues by discussing its five themes for 2018: 1) matters of importance to retail investors, including seniors and those saving for retirement; 2) compliance and risks in critical market infrastructure; 3) FINRA and Municipal Securities Rulemaking Board (MSRB) oversight; 4) cybersecurity; and 5) anti-money laundering (AML) programs. For the purposes of this blog post, we will focus on certain sub-categories within these themes, but we recommend readers review the entire 2018 Priorities Letter.

On the subject of prioritizing retail investors and those saving for retirement, OCIE describes several priorities including disclosures of costs, senior investors, and retirement accounts and products. Based on other SEC public pronouncements, OCIE will likely be scrutinizing registrant recommendations regarding rollovers as well. Regarding retail investors, OCIE bluntly states: “Every dollar an investor pays in fees and expenses is a dollar not invested for his or her benefit.” OCIE further admonishes that the proper disclosure and calculation of fees, expenses and other charges investors pay is critically important. OCIE further advises financial professionals to inform investors of any conflicts of interest that might provide incentives for the financial professionals to recommend certain types of products or services to investors, including any higher-cost or riskier products. Regarding retirement accounts, OCIE states that it will continue to conduct examinations of investment advisers and broker-dealers that offer services and products to investors with retirement accounts. Specifically, these examinations will focus on, among other things, investment recommendations, sales of variable insurance products, and sales and management of target date funds. In addition, OCIE will examine investment adviser and broker-dealer involvement in retirement vehicles that primarily serve state and local government employees and non-profits, including 403(b) and 457 plans. OCIE does not, however, mention the Department of Labor fiduciary regulations in its priorities, which, in light of current circumstances, is not very surprising.

As expected, cybersecurity and AML return again as priorities. Regarding cybersecurity, consistent with its risk alerts, OCIE advises that its examinations will focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response. Regarding AML, OCIE’s reviews will cover: whether customer identification programs are reasonable for entities to understand the nature and purpose of customer relationships and risks; whether entities are filing timely, complete and accurate suspicious activity reports (SARs); and whether entities are conducting robust and timely independent testing of their AML programs.

On the subject of self-regulatory organization examinations, OCIE apparently plans to be more aggressive in 2018 as it relates to the SEC’s oversight of FINRA and MSRB. Interestingly, this topic was not discussed with any level of detail in last year’s edition. As a result of this heightened scrutiny, FINRA and MSRB may in turn become more aggressive with their member firms.

Another sub-category addition by OCIE this year discusses cryptocurrency, initial coin offerings, secondary market trading and blockchain. OCIE will continue to monitor the sale of these products and – when securities are involved – examine for compliance with regulatory requirements. The remaining sub-categories within the five themes discussed above include: electronic investment advice, wrap fee programs, never-before-examined investment advisers, mutual funds and exchange traded funds, municipal advisors and underwriters, fixed income order execution, clearing agencies, national securities exchanges, transfer agents, and “Reg. SCI” entities.

The 2018 Priorities Letter, consistent with letters from years past, is ambitious and attempts to cover almost all corners of the securities industry. This year, in a positive way, OCIE has provided more detail than in years past. This increased transparency in the 2018 Priorities Letter will allow registrants to assess and tailor their compliance programs accordingly.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

About the Author: Jamie L. Helman

Jamie L. Helman concentrates her practice on securities, broker-dealer arbitration, litigation, mediation, employment matters, and regulatory defense. She has experience first-chairing FINRA arbitrations, defended on-the-record testimony of broker-dealer employees before FINRA, and is presently involved in the representation of broker-dealers in several pending FINRA cases as well as regulatory matters.

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