SEC Announces Examination Priorities for 2016

On January 11, 2016, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) issued its annual report of priorities for examinations to be conducted in 2016.  Again this year, the SEC’s three main priorities for examinations of investment advisers remain: (1) examining matters of importance to retail investors and investors saving for retirement; (2) assessing issues related to market-wide risks; and (3) identifying registrants that may be engaged in illegal activity.  In addition, the SEC will also focus on issues particular to municipal advisers, investments in private placements, private fund advisers, and transfer agents.  Finally, the SEC’s report reiterates the agency’s intention to continue its efforts to conduct focused, risk-based examinations of advisers who have been registered for three (3) years but not yet examined.

  1. Matters of Importance for Retail Investors

In this year’s report, the OCIE reiterates its emphasis on evaluating advisory services offered to retail and retirement investors.  The OCIE again notes this year that retail investors are more dependent than ever on their own investments for retirement, and are therefore in greater need of unbiased investment counsel.  Accordingly, OCIE will focus on the following issues this year:

  • ReTIRE. In mid-2015, the SEC launched the ReTIRE initiative, which specifically focuses on those advisers offering services to investors with retirement accounts. The examination of retirement planning advisers concentrates on the reasonableness and suitability of recommendations made to investors, the conflicts of interest in the advice given, supervision and compliance controls for such advisers, and their marketing and disclosure practices.
  • Exchange-Traded Funds. This year, OCIE examinations will focus on ETFs and funds’ overall compliance with exemptive relief and other regulatory requirements, such as sales and trading practices, disclosures, excessive portfolio concentration, primary and secondary market trading risks, suitability and leverage. Although investment company management and compliance issues have been identified as priorities in the past, this is the first time in several years that ETFs have specifically been singled out as a priority.
  • Branch Offices. Advisers’ supervision of financial adviser representatives in branch offices will be examined for deviation from the firm’s compliance protocols.
  • Fee Selection and Reverse Churning. Examinations in 2016 will continue to focus generally on advisers’ investment recommendations and whether the recommendations are in the best interest of the client, including fees, services, and disclosures of the conflicts.
  • Variable Annuities. OCIE will focus on the sale of variable annuities to retail investors, particularly retirement investors, to determine whether the sale was suitable, and whether there was adequate disclosure to the customer.
  • Public Pension Advisers.  This year, the SEC will emphasize examining advisers to government entities for compliance with the Dodd-Frank pay-to-play prohibitions.
  1. Assessment of Market-Wide Risks

The report reiterates that the mission of the SEC includes not only investor protection and capital formation, but also maintaining fair, orderly, and efficient markets.  OCIE will, therefore, focus on examination initiatives aimed at detecting structural risks and trends that may involve multiple firms or entire industries.  Specifically, the SEC will continue to monitor the largest U.S. asset managers and clearing agencies for the purpose of assessing risks at individual firms and maintaining early awareness of developments industry-wide.  Investment advisers’ cybersecurity compliance and controls will also continue to be a priority this year, as well as monitoring the liquidity risks of advisers to investment companies.

  1.  Identification of Potential Illegal Activity

Over recent years, the SEC has developed analytical systems capable of identifying registrants and firms that appear to be engaged in potentially illegal activity.  Specifically, the OCIE has developed the capacity to analyze data identifying individuals with a track record of misconduct, and now closely monitors the activities of those firms that employ such individuals.  OCIE has also enhanced its ability to detect broker-dealers and transfer agents that may be engaged in, or aiding and abetting, pump-and-dump schemes or market manipulation, and identifying introducing brokers and registered representatives that appear to be engaged in excessive trading.  The OCIE will continue to develop analytical tools and systems to detect quickly those individuals and firms potentially engaged in illegal activity.

  1.  Other Examination Initiatives

Lastly, the 2016 OCIE report indicates that the agency will continue several examination initiatives introduced in recent years.  The most important of these initiatives include the risk-based examinations of “never-before-examined” investment companies and advisers, enhanced review of private placements under Regulation D and the marketing, sales and trading practices of advisers to private funds.  These examination initiatives are intended to address the risks to both investors and the overall market posed by certain investment advisers and pooled investment vehicles.





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About the Author

John Quinn has eighteen years of securities regulation, compliance and litigation experience in private practice and government service.  In private practice, Mr. Quinn has successfully represented investment companies, investment advisers, broker-dealers, securities professionals, insurance companies and agents in compliance, transactions, litigation, arbitration, regulatory, and employment matters.  As the former Director of the Division of Corporation Finance for the Pennsylvania Department of Banking and Securities (2006 – 2009), Mr. Quinn was responsible for the registration of securities sold in the Commonwealth of Pennsylvania and for the regulation of financial services professionals marketing such securities.  Mr. Quinn has testified as to securities issues before the Pennsylvania Legislature and was a featured lecturer on securities issues at national regulatory and compliance conferences.  In 2009, Mr. Quinn was appointed as Chairman of the North American Securities Administrators Association’s Corporate Accountability Project Group, through which Mr. Quinn sponsored policy initiatives in the field of corporate governance.

Mr. Quinn graduated magna cum laude from Villanova University (B.S., International Business) and with high honors from the George Washington University’s National Law Center (Juris Doctor).  Mr. Quinn is licensed in Pennsylvania.



NOTICE:   This memorandum was prepared for informational purposes only to report on recent developments that may be of interest to the recipients.  The information provided herein is therefore general, and should not be considered or relied on as legal advice, nor should receipt of this memorandum constitute the creation of legal representation.