SEC Releases Top Seven Exam Priorities for 2020
On January 7, 2020, the staff of the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced its 2020 examination priorities. Many of the identified examination priorities directly impact investment advisors—and new investment advisors in particular. According to OCIE’s 2020 examination priority list, new investment advisors and those investment advisors registered but never examined prior, can expect a greater likelihood of examination in 2020.
The OCIE announced it completed 3,089 examinations in fiscal year 2019, which is a 2.7% decrease from FY 2018. According to the report, the SEC views this as a relatively minor decrease, when viewed in light of an approximate month-long suspension of virtually all examination activity due to the government shutdown.
In addition to the aforementioned focus area relating to investment advisers, OCIE’s 2020 examination priorities are:
Retail Investors, Including Seniors and Those Saving for Retirement
The OCIE will continue its focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest.
The OCIE will continue its focus on entities that provide services critical to the functioning of our capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. Particular attention will be focused on the security and resiliency of entities’ systems.
The OCIE will also continue to prioritize cyber and other information security risks across the entire examination program.
Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors
The OCIE will continue its risk-based examinations for each type of these registered entities. In particular, examinations of registered investment advisers (RIAs) will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds.
Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs, and the oversight practices of their boards of directors. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent rulemaking, along with trading practices. Municipal advisor examinations will include review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.
Anti-Money Laundering Programs
The OCIE will continue to review for compliance with applicable anti-money laundering (AML) requirements, including whether entities are appropriately adapting their AML programs to address their regulatory obligations.
Fintech and Innovation, Including Digital Assets and Electronic Investment Advice
The OCIE recognizes that advancements in financial technologies, methods of capital formation and market structures, as well as registered firms’ use of new sources of data (often referred to as “alternative data”), warrant ongoing attention and review. The OCIE also will continue to identify and examine SEC-registered firms engaged in the digital asset space, as well as RIAs that provide services to clients through automated investment tools and platforms, often referred to as “robo-advisers.”
FINRA and MSRB
The OCIE will continue its oversight of the Financial Industry Regulatory Authority (FINRA) by focusing examinations on FINRA’s operations, regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors. The OCIE will also continue to examine the Municipal Securities Rulemaking Board (MSRB) to evaluate the effectiveness of its operations and internal policies, procedures, and controls.
Below is a graph that identifies the SEC’s examination priorities for the past three years.
|Anti-Money Laundering (“AML”)||X||X||X|
|Broker Dealer Financial Responsabilities||X|
|Crypto, Initial Coin Offerings, Secondary Markets and Blockchain||X||X||X|
|Disclosure of the Costs of Investing||X||X|
|Electronic Investment Advice||X||X|
|Exchange-Traded Funds (ETFs)||X||X||X|
|Fraud Sales Practices and Conflicts||X|
|Fixed Income Order Execution||X|
|Investment Advisors/Companies/Compliance Programs||X|
|Money Market Funds||X|
|Municipal Securities and Other Fixed Income Securities||X|
|National Securities Exchanges||X||X||X|
|Never Before Examined Investment Advisors||X||X||X|
|Payment for Order Flow||X|
|Regulation Systems Compliance and Integrity (“SCI”)||X||X||X|
|Share Class Selection||X|
|Reg BI/Stndards of Care||X|
|Trading and Broker Dealer Risk Management||X|
|Wrap Fee Programs||X||X|
|Broker-Dealers Entrusted with Customer Assets||X|