SEC and FINRA Exam Priorities
The SEC and FINRA announced the priorities for their examination programs from 2015 this week. The SEC priorities build in several respects on those from the prior year. They are divided into four areas which, to some extent, overlap: 1) retail investors; 2) market wide risks; 3) data analytics; and 4) other areas.
Retail investors: In view of recent trends in the industry, including the fact registrants are developing and offering to retail investors a variety of new products and service and the fact that investors are increasingly dependent on their investments for retirement, the program will focus on four key areas that tend to center on retirement accounts:
- Fee arrangements: In view of trends among financial professionals to service retail investors as investment advisers, the program will focus on recommendations regarding account types and if they are in the best interest of clients, including the fees charged and the risks.
- Sales practices: This area will focus on the sales approach used regarding the movement of retirement assets from employer plans to individual accounts, including the fees charged and the risks.
- Suitability: The staff will focus on recommendations and determinations to invest retirement assets into complex or structured products and higher yield securities including due diligence conducted, disclosures made and the suitability of recommendations.
- Branch offices: In this area the staff will focus on supervision issues and use its analytics (see below) to assess deviations from compliance practices.
Market-wide risks: In this area the program will focus on structural risks and trends that can impact multiple firms or an entire industry. Areas of focus include:
- Large firms: In conjunction with Trading and Markets the program will focus on the largest broker-dealers and asset managers to assess risk at individual firms and across industries.
- Clearing agencies: All agencies assessed as systemically important will be examined using a risk based approach.
- Cybersecurity: Building on an initiative started last year, the program will focus on compliance and controls.
- Execution: The program will focus on potential conflicts involving payments or credits for order-flow and the duty of best execution.
Data analytics: Enhanced analytics will be used to assess the potential to engage in fraudulent and/or other potentially illegal activity including:
- Recidivists: This involves the identifications of those with a record of misconduct.
- Microcap fraud: The focus here is to identify brokers and transfer agents that may be involved with microcap fraud such as market manipulations. Enforcement also has a microcap fraud task force which focuses on these areas.
- Excessive trading: The focus here is on clearing and introducing brokers to identify excessive trading. This complements the retail issues listed above.
- AML: This will focus on clearing and introducing brokers that have not filed SARs or have filed reports which are incomplete and brokers who permit deposits of cash or direct access to the markets.
Other areas: Other priorities for the Division include municipal advisers, proxy services, never before examined investment companies, fees and expenses in private equity and transfer agents.
FINRA: The regulator plans to focus on the sale and supervision of interest rate sensitive and complex products, transactions centered on wealth events for investors and cybersecurity, including platforms that interact with the markets. In addition, FINRA identified five broad areas of focus:
- The alignment of firm and customer interests;
- Standards of ethical behavior;
- The development of strong management and supervisory systems;
- The development and marketing of novel products and services; and
- The management of conflicts of interest.