SEC Identifies Areas of Heightened Risk in 2016 Examination Priorities

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) identified key areas of risk in its Examination Priorities for 2016. These include protecting retail investors, assessing market-wide risks and using data analytics to find illegal activity.

Specifically, the OCIE identified the following as areas of regulatory focus:

Retail Investors

  • Advice offered to investors with retirement accounts
  • Exchange-Traded Funds (“ETFs”) – including investor compliance with exemption terms, sales practices, trading and disclosures. (Staff indicated that it would focus on “niche” ETFs and those that use leverage.)
  • Branch Offices – including supervision of representatives through the use of “data analytics” to catch “inappropriate” trading
  • Fee Selection and Reverse Churning – including matters where clients may be charged fees inappropriately on the basis of assets rather than trading
  • Variable Annuities – including sales issues
  • Public Pension Advisers – including gifts and entertainment

Assessing Market-Wide Risks

  • Cybersecurity
  • Regulation Systems Compliance and Integrity
  • Liquidity Controls – the OCIE identifies this specifically as an issue for funds
  • Clearing Agencies – for systemic risk

Data Analytics

  • Recidivist Representatives and Their Employers
  • Anti-Money Laundering
  • Microcap Fraud
  • Excessive Trading
  • Product Promotion


  • Municipal Advisors
  • Private Placements – with a focus on the EB-5 program for immigrants
  • Never-before-Examined Advisers
  • Private Fund Advisers – with a focus on whether they favor accounts that are charged performance fees
  • Transfer Agents

Lotchie Comment: The OCIE indicates that one of its areas of priority is determining whether investors’ assets are being put into accounts that are charged on the basis of assets under management rather than trading volume. It should be clear that the effect of the regulators’ drive to impose a “fiduciary” obligation on broker-dealers providing recommendations will be to motivate broker-dealers to move clients into accounts charging asset-backed fees. After all, an account that pays only transactional fees might not cost-justify the risk of a broker-dealer taking on fiduciary obligations (since it is unclear what those obligations might entail). Or, to put it differently, (i) if a broker charges an asset-based fee but does not do a lot of trading, then the broker risks getting dinged for overcharging; and (ii) if the broker charges transaction fees but does not do a lot of trading, then the broker does not make any money while taking on fiduciary responsibilities. It will be interesting to see whether the imposed obligation affects the ability of small or medium clients to access broker-dealer services.