The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) today announced its 2020 examination priorities, and registered investment advisors (RIAs) are squarely in the crosshairs.
In particular, examinations of RIAs will focus on those that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined, OCIE said in a statement Tuesday. These examinations will include RIAs advising retail investors as well as private funds.
OCIE publishes its examination priorities annually to enhance the transparency of its examination program and to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.
“OCIE’s 2020 examination priorities identify key areas of risk, both existing and emerging, that we expect self-regulatory organizations (SROs), clearing firms, investment advisers and other market participants to identify and mitigate. I applaud OCIE’s thoughtful, strategic and efficient focus, which is critical to the fulfillment of the SEC’s mission and our service to Main Street investors,” said SEC Chairman Jay Clayton.
“As markets evolve, so do risks and potential harm to investors. OCIE continually works to adjust its examination focus areas to target these risks and publishes its annual priorities to communicate where we see the potential for increased risk and related harm. We hope that this transparency helps firms evaluate and improve their compliance programs, which ultimately helps protect investors,” said OCIE Director Pete Driscoll.
2020 exam priorities
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—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.
Market infrastructure—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.
Information security—OCIE will continue to prioritize cyber and other information security risks across the entire examination program.
Focus areas relating to investment companies, broker-dealers, and municipal advisors—OCIE will continue its risk-based examinations for each type of these registered entities. 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—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.
Financial technology (Fintech) and innovation, including digital assets and electronic investment advice—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. 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—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. 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.
Reg BI’s role
The Commission finalized many new rules and interpretations in FY 2019 that will impact firms and OCIE in 2020.
The most significant is the package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with RIAs and broker-dealers, “bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access, in terms of choice and cost, to a variety of investment services and products,” according to the 28-page OCIE 2020 Examination Priorities document released Tuesday.
Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Advisers Act, which will be FY 2020 examination priorities.
The SEC has set June 30, 2020 as the compliance deadline for the implementation of Reg BI, and said it believes that is “sufficient time” for firms to comply in light of its June 5, 2019 issuance. A pair of lawsuits (one filed by Michael Kitces’ XY Planning Network, LLC and member firm Ford Financial Solutions, LLC, and the other by attorneys general from seven states and the District of Columbia) could very well delay the implementation date.
OCIE said it recognizes that these new rules will require various market participants to make changes to their operations, including to required disclosures, marketing materials and compliance programs.
OCIE says its risk-based approach results in examinations that are focused on key aspects of the SEC’s regulatory oversight, such as the adequacy of disclosures concerning services, fees and expenses; firms’ management and handling of conflicts of interest for RIAs; and sales practice, trading and execution quality issues for broker-dealers.
OCIE will also continue to examine RIAs to assess whether, as fiduciaries, they have fulfilled their duties of care and loyalty. This will include assessing, among other things, whether RIAs provide advice in the best interests of their clients and eliminate, or at least expose through full and fair disclosure, all conflicts of interest which might incline an RIA, consciously or unconsciously, to render advice which is not disinterested.
A quick look back at 2019
OCIE announced it completed 3,089 examinations in fiscal year 2019, which is a 2.7% decrease from FY 2018. OCIE notes it is a relatively minor decrease, when viewed in light of an approximate month-long suspension of virtually all examination activity due to a lapse in appropriations.
OCIE reports annually the percentage of the population of RIAs examined each year. This metric is important as OCIE is the primary, and often only, regulator responsible for supervising this segment of financial firms.
The population of RIAs has grown significantly in recent years, as has the amount of assets those RIAs manage. More specifically, in just the last five years, the number of RIAs OCIE oversees increased from about 11,500 to 13,475, and the assets under management of RIAs increased from approximately $62 trillion to $84 trillion.
Examinations of RIAs in FY 2019 totaled approximately 2,180, covering 15% of this population. OCIE says this was strong in a year where the RIA population continued to increase and the SEC experienced that 35-day lapse in appropriations. OCIE has increased its examination coverage of RIAs over the past several years from 10% in FY 2014 to a high of 17% in FY 2018.
During FY 2019, OCIE issued more than 2,000 deficiency letters, with many firms taking direct corrective actions in response to those letters, including by amending compliance policies and procedures or a regulatory filing; enhancing their disclosures; or, returning fees back to investors, among other things.
- Read the complete SEC 2020 Examination Priorities here
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.