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Five Takeaways for Investment Advisors and Broker-Dealers on the SEC’s 2019 Examination Priorities


By Lauren Kim, AVP, Claims Practice Leader - Financial Institutions, QBE North America

On December 20, 2018, the SEC Office of Compliance Inspections and Examinations (“OCIE”) published its 2019 Examination Priorities.  OCIE is responsible for overseeing more than 13,200 investment advisers, 10,000 mutual funds and exchange traded funds, 3,800 broker-dealers, 600 municipal advisors, 21 national securities exchanges and FINRA.

The OCIE releases its examination priorities annually to promote transparency and provide insights into the areas it believes present potentially heighted risk to investors or the integrity of the U.S. capital markets.  Five key takeaways from the report and their anticipated impact on advisors and broker-dealers are reviewed below:

1. Protections for Retail Investors.  OCIE prioritizes the protection of retail investors, which in 2019 will include review of fees and expenses in the following areas:

  • ensuring that investors are provided with proper disclosures of the fees and expenses paid for products and services;
  • confirming that financial professionals accurately calculate and charge fees in accordance with these disclosures; and 
  • reviewing fees charged to advisory accounts and ensuring they are assessed in accordance with client agreements and firm disclosures.

OCIE will also review the services and products offered to seniors and those saving for retirement. These examinations will focus on compliance programs of investment advisers, the appropriateness of certain investment recommendations to seniors and the supervision by firms of their employees and independent representatives.

To meet regulatory scrutiny, investment advisors should compare their funds' fee and expense agreements and disclosures against the amounts charged to their funds.  Fund expenses should be appropriately disclosed to investors and fees assessed in accordance with fund agreements and disclosures.

2. Conflicts of Interest. One of OCIE’s goals is to maintain investor confidence in the markets and investment professionals.  To that end, OCIE will review investment advisers to ensure they are acting in a manner consistent with their fiduciary duty and meeting their contractual obligations to their clients.  Examinations will review policies and procedures addressing the use of affiliated service providers and products, securities-backed non-purpose loans and lines of credit and funds borrowed from clients.  For these practices, OCIE will assess the adequacy of disclosures of risks to clients and conflicts of interest, and whether brokers or advisers are acting in a manner consistent with these disclosures.

Conflicts of interest can be difficult to identify.  Advisors should review their relationships and make sure they are properly disclosed.  For example, advisors to funds that use service providers that are also affiliates of the funds' managers – such as affiliated property managers in real estate funds – could be viewed as a conflict of interest.  Advisors to such funds should review their Form ADVs and client documents to ensure that appropriate disclosures about these relationships have been made to fund investors.

3. Cybersecurity.  Cybersecurity was one of OCIE’s areas of focus in 2018. It continues to be an area of focus in 2019.  The scope of focus has sharpened this year to include proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. OCIE will also continue to focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response.

Specific to investment advisers, OCIE will emphasize cybersecurity practices at investment advisers with multiple branch offices, including those that have recently merged with other investment advisers.  To that end, investment advisors should review their cybersecurity policies and procedures to ensure that they comply with SEC guidance regarding cybersecurity matters.

4. Digital Assets.  Given the significant growth and risks presented in the digital asset market, OCIE will monitor the offer and sale, trading and management of digital assets.  If the products are securities, OCIE will examine them for regulatory compliance.  OCIE examinations will focus on portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance and internal controls.

Investment advisers engaged with digital assets should ensure they comply with the SEC rules regarding digital assets, especially the adequacy of disclosures in offering materials and policies and procedures related to both the pricing of digital assets and related transactions.

5. Anti-money Laundering.  OCIE will prioritize examining broker-dealers for compliance with their anti-money laundering (“AML”) obligations, including whether they are meeting their SAR filing obligations, implementing all elements of their AML program and robustly and timely conducting independent tests of their AML program.

Broker-dealers should review their policies and procedures to ensure they are reasonably designed to identify suspicious activity and illegal money laundering activities.

A complete copy of the report can be found at: https://www.sec.gov/files/OCIE%202019%20Priorities.pdf

The subject matter and opinions expressed herein are the opinions of the individual author and may not reflect the opinions of QBE.  The contents herein are for informational purposes only and not for the purpose of providing legal, regulatory, or compliance advice.  The reader should contact his or her own attorney or compliance professional to obtain advice with respect to any particular issue or problem.