In its “Examination Priorities for 2017,” the SEC Office of Compliance Inspections and Examinations (“OCIE”) set forth priorities based on current issues that “present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.” The OCIE will focus future examinations on (i) retail investors, (ii) senior investors, and (iii) market-wide risks. The OCIE’s examination priorities follow closely on the heels of FINRA’s announced examination priorities.
Specifically, the OCIE prioritized examination in the following areas:
- Retail Investors: The OCIE highlighted: (i) the provision of electronic trading advice (given the DOL’s fiduciary rule that drives the market in that direction), (ii) wrap fee programs, including whether the level of trading quality offered is high enough and the programs are cost-efficient for investors, (iii) exchange-traded funds, particularly their suitability and the creation/redemption process, (iv) never-before-examined advisers, (v) recidivist firms and individuals, (vi) multi-branch advisers, particularly their design and implementation of supervisory systems, and (vii) share selection in multi-class mutual funds (i.e., whether investors are being sold the cheapest share class).
- Senior Investors: The OCIE will devote increased attention to its multi-year ReTIRE initiative, investors’ use of public pension advisers, and risks posed to senior investors.
- Market-Wide Risks: The OCIE will focus on: (i) money market funds, especially concerning systemic risk issues, (ii) payment for order flow (an increasingly significant issue due to the narrowness of spreads), (iii) systemic risk issues of clearing agencies, (iv) the quality of FINRA examinations, (v) compliance with Regulation SCI and cybersecurity, (vi) the securities exchanges, and (vii) anti-money laundering.
The OCIE noted that it expects to allocate examination resources to other priorities that include (i) municipal advisors, (ii) transfer agents, and (iii) private fund advisers.
OCIE Director Marc Wyatt explained the importance of the announcement:
“OCIE’s priorities identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements.”
Lofchie Comment: OCIE’s intention to enhance oversight of FINRA is most interesting. FINRA has been aggressive in sanctioning firms in the past. Perhaps FINRA’s increasing significance is the reason, since it has taken over the regulatory examination role for virtually all of the securities exchanges.