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Legal Update for Securities

SEC Announces 2016 Examination Priorities

On January 11, 2016, the SEC announced its Office of Compliance Inspections and Examinations' (OCIE) 2016 priorities. The examination priorities address issues pertaining to financial institutions, investment advisers, investment companies, broker dealers, transfer agents, clearing agencies and national securities exchanges. The priorities broadly focus on three themes: protecting retail investors, market wide risks and data analytics.

With respect to protecting retail investors, the SEC placed a particular focus on investors saving for retirement. It was noted that retail investors of all ages face a complex and evolving set of choices when determining how to invest their money. Moreover, as investors are more dependent than ever on their own investments for retirement, the financial services industry is offering a broad array of information, advice, products and services to help plan for, and live in, the retirement years. 

The SEC further indicated that it is planning and/or conducting various examination initiatives to assess risks to retail investors that could arise from various trends, including:

  • Continuation of the multi-year examination initiative focusing on SEC-registered investment advisers and broker dealers and the services they offer to investors with retirement accounts, which includes examining the reasonable basis for recommendations, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.
  • Review of regulated entities' supervision of registered representatives and investment adviser representatives in branch offices, including using data analytics to identify potential inappropriate trading.
  • Examination of investment advisors and dually-registered investment adviser/broker dealers who offer retail investors a variety of fee arrangements and whether those recommendations are in the best interests of the investor at the inception of the arrangement and thereafter.
  • Suitability of sales of variable annuities to investors, as well as the adequacy of disclosure and supervision of such sales. 
  • Examination of advisors to municipalities and other government entities focusing on pay-to-play and certain other key risk areas, including the identification of undisclosed gifts and entertainment. 

With respect to market-wide risks, cybersecurity continues to be a focus. In the accompanying release, the SEC indicated that to fulfill its mission of maintaining fair, orderly and efficient markets, it will continue to focus on cybersecurity controls at broker dealers and investment advisors. It was noted that the SEC had launched its second initiative to examine broker dealers’ and investment advisers' cybersecurity compliance and controls in September 2015. In 2016, it will advance these efforts, which include testing and assessments of firms' implementation of procedures and controls. 

With respect to data analytics, the SEC notes that it always strives to detect risks across the industry. To that end, it utilizes data and intelligence to identify registrants who appear to have elevated risk profiles. The SEC will continue to leverage its capabilities in the area of data analytics to include anti-money laundering, excessive trading and product promotion. 

The SEC also indicated that it would allocate examination resources to other priorities, including "never before examined" investment advisers and investment companies. The SEC will continue to conduct focused, risk-based examinations of selected registered investment advisers who have not yet been examined. OCIE previously commented on the "never before examined" investment adviser initiative via releases on February 20, 2014, and April 20, 2015.

Finally, the SEC noted that its description of priorities is not exhaustive. The SEC expects to allocate significant resources throughout 2016 to the issues identified, but it will also conduct examinations focused on risks, issues and policy matters that arise from market developments and new information learned from examinations or other sources, including tips, complaints and referrals, as well as coordination with other regulators. OCIE welcomes comments and suggestions.

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