SEC Sheds Light on Regulatory Priorities for 2017

In January, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its examination priorities for 2017. This year’s priorities signal that the SEC is continuing to focus on a wide range of issues impacting markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice. The priorities are organized around three key themes – protecting retail investors, examining issues affecting elderly investors and retirement investments, and assessing market-wide risks – and the SEC’s publication of them provides an opportunity for firms to evaluate their respective compliance programs with these areas in mind.

1. Protecting Retail Investors

As part of its broader objective to protect retail investors, the SEC plans to examine firms delivering investment advice through automated and digital platforms, including “robo-advisers.” Examinations will focus on the compliance programs in place to oversee the algorithms generating the investment recommendations, as well as compliance with marketing and data protection.

The regulator will also:

1. Review whether investment advisers and broker-dealers associated with wrap free programs are acting in a manner that respects both their fiduciary duty and their contractual obligations;
2. Continue to examine exchange traded funds, and their compliance with applicable exemptive relief granted under regulatory requirements, as well as their unit creation and redemption processes; and
3. Expand its “Never-Before-Examined Adviser” initiative to include risk-based examinations of newly registered advisers who have not been reviewed by OCIE.

In addition, the SEC plans to continue its use of analytics to identify people with a history of misconduct and to examine the compliance programs of investment advisers that employ them. Further, OCIE said it will continue to focus on investment advisers that provide services from multiple locations, as multiple branch offices can lead to unique risks and challenges, especially when it comes to the implementation and application of compliance programs.

2. Senior Investors and Retirement Investments

With the U.S. population aging, and with older investors relying on their own investments for retirement income, the SEC will be devoting more attention to elderly investors and people investing for retirement.

As such, the regulator plans to continue its multi-year ReTIRE initiative, focusing on advisers and broker-dealers offering services to investors with retirement accounts. This year it will focus more attention on examining registered advisers’ recommendations and the sale of insurance products, in addition to the sale and management of target date funds. Further—and pointing to the fact that pension plans of states, municipalities and other government entities hold the retirement assets of a many U.S. investors—the SEC will review the firms that advise these entities with the aim of assessing how they manage conflicts of interest and fulfill their fiduciary duty.

By narrowing in on the supervisory programs and controls firms have in place, the SEC also plans to examine whether firms have the ability to identify the financial exploitation of seniors. To do so, it will review how firms manage their interactions with elderly investors.

3. Assessing Market-Wide Risks

The SEC, as part of its mission to maintain “fair, orderly, and efficient markets,” will also examine structural risks and trends. In 2017, the regulator will lead several initiatives, including examining money market fund compliance, assessing select broker-dealers’ compliance with their duty of best execution, and conducting annual examinations of clearing agencies deemed systemically important.

Regarding systems compliance and integrity (SCI), OCIE will continue to review SCI entities to determine whether they have established and enforced policies and procedures that reasonably ensure their systems are built and maintained in a manner that supports operational capacity and promotes maintenance of fair and orderly markets, while operating in compliance with the Exchange Act.

Other initiatives include a continued focus on cybersecurity compliance, risk-based inspections of the national securities exchanges, and examinations of broker-dealers’ Anti-Money Laundering programs, especially as they relate to the risk of financing terrorism.

4. Other Initiatives

The SEC also expects to allocate resources to the examination of municipal advisers, including their industry outreach and education initiatives; transfer agents servicing microcap issuers that may be engaging in unregistered, non-exempt offerings; and private fund advisers, with a focus on conflicts of interest and disclosure of conflicts.

While several of OCIE’s 2017 priorities carry over from previous years, this year’s priorities and themes serve as an important road map for a firm’s compliance strategy. Insight into what’s important for the regulator can help firms focus their own efforts and resources, reduce the possibility of investigation, and boost the chances for a smooth process should they find themselves under examination.