The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) released its 2015 examination priorities for investment advisers, broker-dealers, and transfer agents. OCIE will focus its efforts on issues related to market-wide risks, analyzing data to prevent illegal activity and protecting investors who are saving for retirement, which are discussed in turn below:
- Assessing Market-Wide Risk
OCIE intends to examine widespread firm and industry structural risks. OCIE will closely monitor the largest of broker-dealers and asset managers. Large firms allow for better understanding of market trends as a whole. Additionally, clearing agencies will face increased scrutiny in 2015. As we have previously discussed, the SEC will examine broker-dealers’ cybersecurity compliance programs. Lastly, OCIE will increase their efforts of tracking firms’ trading history against their best execution policies. OCIE intends to work with the Division of Trading and Markets and other regulatory agencies to address market-wide risks.
- Use of Data Analytics
As SEC Chair Mary Jo White noted in her speech at the New York Times DealBook Conference in December, OCIE will increase its use of data analytics in examinations. OCIE will use data to identify individuals that are repeat offenders and will examine their employers. Additionally, data analytics will be used to identify excessive trading, market manipulation, and pump-and-dump schemes. Lastly, the OCIE will test firms’ anti-money laundering policies with collected data.
- Protecting Investors Saving for Retirement
The most significant theme of OCIE’s examination priorities is the protection of retail investors and investors saving for retirement. This includes investigating the suitability and sales practices for retirement products to individual investors. OCIE intends to examine branch office practices for deviations from the policies set out in compliance programs. Two types of companies the OCIE will examine closely are alternative investment companies and fixed income investment companies. The SEC considers alternative investment companies to be those that make returns that are uncorrelated to the stock market. Companies that act as both broker-dealers and registered investment advisers will likely be examined for the appropriateness of account types offered to their clients.
In addition to these three themes, the OCIE intends to examine transfer agents, municipal advisers, and never-before-examined registered investment company complexes. The SEC will also place significant emphasis on examining fees and expenses in private equity funds. OCIE noted many inconsistencies among private equity advisers in 2014 and plans to act on those findings in 2015. Advisers should review the SEC’s release in its entirety and consult their legal counsel and/or compliance consultant to best prepare for their next examination.